Lyle Stein, senior portfolio manager and managing director at Vestcap Investment Management

Focus: Canadian equities

MARKET OUTLOOK

Dissecting volatility

With the wisdom of hindsight, the market carnage of Q4 was a result of four fundamental factors:

1. Rising long bond yields and an expectation of further Fed tightening
2. A material slowdown in post-tax cut earnings growth
3. Fears of further escalation of a China-U.S. trade war
4. A general slowing of global growth and associated political fears (Such as Brexit and populism)

Since then, the Fed has buckled and China trade angst has been assuaged by Trump.  Earnings growth continues to slow however global growth is now showing cracks. Interest rates have fallen.

Our view is that the correction and recovery were more about liquidity than fundamentals, which continue to deteriorate, especially in Canada.  Managing the wealth of individual clients requires prudence with an emphasis on capital preservation and income, not capital gains.  While we did use some of our cash to wade into the market earlier this year, we are still holding 20 per cent cash looking for bargains as opposed to chasing momentum.

TOP PICKS

TRICON CAPITAL GROUP (TCN.TO)

A unique play on U.S. single family rental homes which is an emerging asset class.  It has decent going in cap rates with significant room for expansion from well-controlled rental growth in specifically chosen U.S. markets.  17 thousand homes in portfolio, with supported expansion for 10-1k more.  In addition to operating rentals, TCN also manages assets for fee, which is a second growth opportunity.  The company has outstanding growth in book value with a growing dividend.

SUNCOR ENERGY (SU.TO)

Suncor is a cash machine with upside to crude. It has long life mining assets with the benefit of downstream refining. The go-to name when sentiment returns to the Canadian energy market.  Yield is 3.7 per cent and the company has indicated its ability to raise its dividend with WTI over $45.

BANK OF NOVA SCOTIA (BNS.TO)

Canada’s worst performing bank with the highest dividend yield.  It’s a contrarian play on global recovery.  Repositioning of assets has created near-term pain, but the time to buy a bank stock is when it is least favoured. Next to BMO, this bank is the least exposed to Canadian real estate. The last quarter miss was due to higher expenses, mostly in new technology that will aid the bank achieve future efficiencies. Five per cent yield provides significant long-term total return potential.

PAST PICKS: FEB. 1, 2018

CAE (CAE.TO)

• Then: $22.67
• Now: $27.83
• Return: 23%
• Total return: 25%

PAYCHEX (PAYX.O)

• Then: $67.03
• Now: $77.17
• Return: 15%
• Total return: 19%

AGNICO EAGLE MINES (AEM.TO)

• Then: $57.85
• Now: $56.36
• Return: -3%
• Total return: -1%

Total return average: 14%

WEBSITE: vestcap.com