Lyle Stein, senior portfolio manager and managing investor at Vestcap Investment Management
Focus: Canadian equities

MARKET OUTLOOK

August and September have once again shown “A Tale of Two Markets,” as our S&P/TSX Index has once-again diverged from its New York peers. What’s troubling for us as Canadian investors is the reality that there’s little other than relative valuation to suggest an immediate reversion to the performance mean.

The bad news is that Canada is anything but “cool.” Our three leading sectors are all suffering from made-in-Canada problems that are of our own making. Financial stocks are struggling with an over-indebted consumer and a toppy housing market. Energy stocks continue to be buffeted by dysfunctional energy policies. Material stocks have caught the Chicken Little flu. In the momentum-driven world of investing today, not being cool has performance consequences never seen before.

What will it take for Canada to be cool again? Top on the list is a decelerating U.S. dollar, which by itself should bring commodities and commodity-driven markets like ours back to life. While the world is paying dearly for the growth of tech and consumer discretionary stocks, it’s also pricing in major economic slowdown when it comes to material stocks: this makes no sense to us. Second is a resolution of the NAFTA discord. Finally, we have to realize that on a sector-by-sector basis, our stocks are simply cheap.

TOP PICKS

ALTAGAS (ALA.TO)

A totally contrarian pick. First, despite an over 9 per cent yield, we believe AltaGas’ dividend is safe. Second, we believe the company is on the way to fixing its balance sheet concerns, though the recent spin-out announcement gave us cause to pause. An easy stock for portfolio managers to hate, returning to even a 6 per cent yield suggests a one-third move in the price. The WGL acquisition caused significant dislocation, but in time should prove beneficial.

VERIZON (VZ.N)

Telecom is the one area where we see better value in the U.S. than Canada. Verizon is the poster child for 5G implementation in the U.S. We see an opportunity for near-term momentum as well a longer-term re-rating as the market factors in higher earnings from both top line growth and higher margins. Its 4 per cent plus yield is very competitive with its Canadian peers. Verizon should benefit from GICS rebalancing at end of week.

AGNICO EAGLE (AEM.TO)

Agnico is the true growth story in the mining sector. Its development of the Nunavut camp has been exceptional, and it paves the way for a steady, industry-leading, long-term growth trend beyond 2019. Solid balance sheet, first-tier management, all that the stock needs to fly is a change in sentiment towards gold.

PAST PICKS: JUNE 27, 2017

NORTHLAND POWER (NPI.TO)

• Then: $23.32
• Now: $22.63
• Return: -3%
• Total return: 3%

TECK RESOURCES (TECKb.TO)

• Then: $21.76
• Now: $32.33
• Return: 49%
• Total return: 52%

CVS HEALTH (CVS.N)

• Then: $80.49
• Now: $79.59
• Return: -1%
• Total return: 2%              

Total return average: 19%

WEBSITE: http://www.vestcap.com/