Michael Sprung, president of Sprung Investment Management
Focus: Canadian large caps

MARKET OUTLOOK

There has been no shortage of optimism in the financial markets as evidenced by the recent advances in the indexes. Most recently, markets have reacted positively to the prospects of several viable vaccines which will hopefully be available by the New Year. Over the past few years, the markets have been led by a relatively narrow selection of stocks, particularly during the pandemic. The prospect of an effective vaccine has been reflected to some degree by a rotation into more economically sensitive sectors in anticipation of a return to a more normal economic activity. However, it may be premature to count on a quick return to so-called normal activity, let alone a continuation of frothy market conditions. Valuations are at relatively high levels, with a cyclically adjusted price-to-earnings ratio near 32 times, although admittedly propped up by a narrow band of stocks. Fighting the pandemic has severely increased debt levels at government, business and consumer levels. This will serve to constrain growth going forward. Given this environment, we believe that stock selection will be key. While the promise of economic expansion is welcome, finding securities in companies with strong balance sheets and management at reasonable valuations will be key.

TOP PICKS

Bank of Nova Scotia (BNS TSX)
Last purchase $54.90 on March 27, 2020.

The Bank of Nova Scotia is attractively valued, trading at a modest discount to its peers on a relative basis. Management has been very conservative in their provisioning for loan losses during the pandemic, which may lead to positive surprises as economic conditions improve.  It remains the most internationally diversified bank, with operations in the Caribbean, Central America and the Pacific Alliance. Over the past seven years, management has re-positioned the bank, exiting 20 non-core countries while extending its reach elsewhere. The balance sheet and liquidity position is strong. At current prices, the stock is yielding an attractive 5.4 per cent.

Suncor Energy Inc (SU TSX)
Last purchase $37.26 on August 27, 2019.

Suncor is the largest integrated energy company in Canada. Management has been very focused on expense control, particularly in major oil sands projects Syncrude and Fort Hills. The company targets an increase in free cash flow of $2 billion over the next five years. In terms of ESG, Suncor will selectively look for opportunities that generate at least mid-teen returns such as biofuels, hydrogen, carbon dioxide sequestration and select wind projects. Greenhouse gas emissions are expected to decline by 30 per cent from 2014 levels by 2030. Suncor is well capitalized and at current prices, the stock yields 4 per cent.

Enbridge Inc (ENB TSX)
Last purchase $43.70 on August 27,2019.

Enbridge's share price has reacted positively to the prospect of improving economic activity that may be commensurate with the deployment of the COVID-19 vaccine, but we believe that it remains undervalued. As the company progresses through its $11 billion capital program in growth projects, future dividend increases are likely to follow as the result of new projects and organic growth.  It is hoped that construction of the Line 3 replacement could begin near year-end now that the key Section 404 permit has been granted by the U.S. Army Corps of Engineers. At current prices, the stock is yielding an attractive 7.8 per cent.

PAST PICKS: DEC. 3, 2019

Alaris Royalty (AD TSX)

• Then: $21.57
• Now: $14.75
• Return: -32%
• Total Return: -26%

The North West Company (NWC TSX)

• Then: $28.72
• Now: $33.25
• Return: +16%
• Total Return: +20%

Fortis (FTS TSX)

• Then: $52.31
• Now: $52.10
• Return: 0%
• Total Return: 3%

Total Return Average: -1%