Full episode: Market Call for Tuesday, December 3, 2019
Michael Sprung, president of Sprung Investment Management
Focus: Canadian large caps
Global economic growth has been anemic in the expansion since the Financial Crisis. U.S. real per capita GDP has advanced at a rate of 1.5 per cent during this period, the slowest expansion rate over a decade since the 1950s. The U.S. economy has done better since Donald Trump took office, but the latest estimates are for slower growth going forward.
The OECD is forecasting slower global growth in GDP over the next few years. This outlook is consistent with global trends in manufacturing, transportation and warehousing, all of which have been impacted by trade disputes. Low interest rates have resulted in a huge increase in global debt. Investors have been pushed into higher-risk assets, which has in turn pushed valuation levels up. Volatility in the global markets, particularly the bond markets, in the third quarter of 2019 would suggest that investors are losing confidence in the market's ability to maintain a positive direction.
In recent months, U.S. indicators point towards a lessening of CEOs’ confidence as trends in new orders and manufacturing decline. Several European economies are also exhibiting weakening economic conditions.
In this environment, we recommend caution in stock selection. Look for companies with strong balance sheets supported by positive cash flow.
- Several clients were raising cash or taking tax losses at year-end. Positions were sold in Manulife, ARC Resources, Vermilion Energy, Precision Drilling, Canadian Natural Resources, Suncor, Encana and Newmont Goldcorp.
- In March 2018, we sold a portion of our exposure to NFI Group at $58.60.
- In June, asset mix rebalancing triggered some minor sales of RBC, Scotiabank, Manulife, CAE and Suncor. One half of the CAE position was sold at $35 in June 2019.
- Sold Enercare on Aug. 1, 2018 at $28.87 when Brookfield offer emerged.
- In the last two months, some partial positions in Manulife, Hudbay, Home Capital, Stuart Olson, North West Company, Canadian Natural and Alaris Royalty were sold to raise cash for several clients.
ALARIS ROYALTY CORP (AD:CT)
Last purchase July 2019 $20.50.
Alaris Royalty invests in a diversified range of North American private companies with the objective to generate cash flows to support dividends to shareholders. Over the past few years, the company has worked through a number of issues with a few investee firms that presented some challenges. In response to these challenges, management has reassessed the manner in which deals have been structured with the objective of having more control in workout situations. Alaris is back on track deploying funds in new opportunities while existing investments are exhibiting positive organic growth. We anticipate that the payout ratio will decrease over the next few years as cash flows increase. The stock is attractively valued and yields around 7.5 per cent at current levels.
THE NORTH WEST COMPANY (NWC:CT)
Last purchase June 2015 $25.
The North West Company is a leading retailer to rural communities and urban neighbourhoods in Canada, Alaska, the South Pacific and the Caribbean. Management is addressing recent competitive challenges focusing on categories and services with higher margin potential. We anticipate that additional store acquisitions and new Giant Tiger openings will further enhance growth opportunities. The integration of North Star Air will lead to further synergies and better logistic solutions. As North West implements these strategies, the stock currently has an attractive dividend yield of 4.7 per cent.
FORTIS INC (FTS:CT)
Last purchase May 2018 $42.45.
Fortis is a North American regulated electric and gas utility operating in five Canadian provinces, nine U.S. states and three Caribbean countries. Over the next few years, Fortis is expected to significantly increase its rate base. The company is currently carrying out a capital expenditure program in the order of $12.9 billion that should sustain a 6 to 7 per cent growth rate. The company is extremely well diversified by asset type, geographic location and regulatory regimes. Going forward, management's focus is anticipated to be more on organic growth within its existing markets as opposed to M&A. Fortis has a history of dividend increases that are expected to continue. The stock currently yields 3.7 per cent.
PAST PICKS: DEC. 10, 2018
- Then: $106.77
- Now: $114.20
- Return: 7%
- Total return: 13%
CANADIAN NATURAL RESOURCES (CNQ:CT)
- Then: $35.98
- Now: $36.17
- Return: 0.5%
- Total return: 4%
- Then: $42.01
- Now: $50.39
- Return: 20%
- Total return: 28%
Total return average: 15%