Lyle Stein, Senior Portfolio and Managing Director, Vestcap Investment Management

Focus: Canadian equities
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Market Outlook
All in all, the Q3 of 2016 was a very good quarter for equity markets around the world. While the 5 per cent S&P/TSX total return lagged behind many of its global peers in the quarter, the Canadian market remains at the top of the list of major markets for its year-to-date performance. Resource stocks and a resurging currency put Canada back on the investment map in 2016.  

On a go-forward basis, we continue to take a cautious view towards markets in general. We see it being very difficult for markets to move meaningfully forward in a never-ending environment of disappointing earnings growth and zero interest rates. Low interest rates were introduced as a "temporary" measure in midst of the '08 to '09 financial crisis. Unfortunately, the temporary measure has now morphed from "lower-for-longer" to "lower-forever," with consequences that are truly "unintended" and having the exact opposite effect of what was anticipated in the early easing move. Consumer behaviour, previously modelled around the notion that low interest rates enhance borrowing and spending, is now the exact opposite. Instead of borrowing at low rates, consumers are saving more and spending less, recognizing that the low return on their savings will not create the retirement income they had previously expected. Pension models are being severely challenged. Low interest rates are handcuffing the profitability of the financial services sector at a time when expanded regulatory and capital controls are limiting earnings capacity. It is a time when investors are buying bonds for capital gains and stocks for income.

Because of our concerns with the macro environment, we believe this is a bottom-up stock pickers’ market. We’ve lifted many stones to find the securities that are presently in our client portfolios.

With a world chasing yield wherever it can be found, we are looking to avoid risk in the securities we want to own. Our client portfolios have very little exposure to bonds — the thought of owning a long term bond with a 1 per cent yield is nothing but "rewardless risk." Our fixed income preference is for selected preferred shares where we can earn 5 per cent yields on high-quality names. We are avoiding high-flying momentum names which have once again ascended to the top of investor buy lists. Early in 2016, we spoke of our commitment to Basic Materials stocks, emphasizing the cheapness of the stocks. We have recently trimmed back our exposure here, selling at a gain what few were willing to look at in the Q1 selloff. 

We like the insurance characteristics of gold shares and REITs. As all the money that has been pushed into the system ultimately sloshes through the system, we only hope that inflation returns quickly, as the alternative is not pretty. We believe stocks are preferable to bonds in virtually all scenarios going forward.

Despite a higher-than-average cash position, the yield on our portfolios remains in the 3 per cent range. We know our clients need to live and are constantly seeking the lowest-risk ways to earn a reasonable yield.

Top Picks

Goldcorp (G.TO) - Recent purchase at $20.70 

Contrarian play in gold sector. New management addressed many issues in early 2016 which took the growth lustre off, disappointing investors. Expect to see a stronger 2H 2016 as changes take hold. Great balance sheet, safe jurisdictions and large market cap make it a trader's vehicle. 

Tricon Capital Group (TCN.TO) - Recent purchase at $9.50

Unique play on North American residential housing. Affords good combination of growth, income and stable assets. One-third of $3 billion total assets are U.S. homes in growth markets: 7,900 homes with average cost of $126K, with average rent of $14K a year. Over $1 billion of assets in fee-generating "fund" business. Good balance sheet and 2.8 per cent yield. Significant discount to our $13 asset value.

Whirlpool Corporation (WHR.N) - Recent purchase at $161

Leading global consumer franchise put on sale. Number one in its four major markets, 50 per cent of sales outside of North America. Play on global middle-class growth and the rebound in U.S. housing/replacement cycle. Strong capital discipline can create margin expansion in slow-growth world. Stronger 2H 2016 expected as currency headwinds abate and cost synergies improve. 9xEPS, growing dividend, solid balance sheet.
 

Past Picks: November 4, 2015

Husky Energy (HSE.TO)

• Then: $19.05
• Now: $16.00
• Return: -14.21%
• TR: -14.21%

National Bank (NA.TO)

• Then: $43.53
• Now: $46.53
• Return: +6.89%
• TR: +12.36%

HudBay Minerals (HBM.TO)

• Then: $6.63
• Now: $5.11
• Return: -23.00%
• TR: -22.70%

Total Return Average: -8.18%
 

Twitter: @Vestcap1988

Website: vestcap.com