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

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MARKET OUTLOOK

In the last month, we have witnessed the return of some volatility in the global stock markets. While valuations have corrected somewhat, they’re still above their longer-term norms. To date, there haven’t been any notable downward revisions in 2018 global economic growth. But ten years is an exceedingly long time for an economic expansion to continue without a slowdown or recession.

During any expansion, there are always elements in the economy that accumulate until things come to a breaking point. All of the same geopolitical concerns stemming from Washington, North Korea, the Middle East and elsewhere remain. NAFTA negotiations drag forward with little evidence of progress. All of these factors lead us to continue exercising caution and prudence in the current environment.

TOP PICKS

BANK OF NOVA SCOTIA (BNS.TO)
Owned by clients and personally. Last purchase on Sep. 16, 2016 at $69.85.

Scotiabank is the most international of the Canadian banks, with branches in the Caribbean, Central and South America. Loan growth in the Latin American markets has been robust. While exposed to Mexico (6 per cent of profits), the future of NAFTA could be of some concern, but there hasn’t been any apparent deterioration in credit quality to date.

Overall, we anticipate that international and Canadian banking results will demonstrate positive trends when Scotiabank reports results on Feb. 27. The current yield of 4.1 per cent is attractive, as are the relative valuation parameters to its peers.

BCE (BCE.TO)
Owned personally and by clients. Last purchase on Feb. 13, 2018 at $56.24.

BCE is Canada's largest communications company. The company's dominant infrastructure build provides some competitive advantage over its primary competitors. Changes in technology and the competitive landscape, however, will require large ongoing capital outlays.

In the wireline business, BCE is leading in its quest to bring fibre that will provide superior internet and related services to the home. The wireless business remains competitive and promotions are expected to continue, but BCE retains the largest market share. The media business remains challenging. In the current environment, we anticipate that BCE will more than hold its own position in the competitive landscape. The current yield of 5.1 per cent is attractive, given the likelihood of future dividend increases.

ENBRIDGE (ENB.TO)
Owned by clients. Last purchase on Nov. 16, 2017 at $44.72.

Enbridge is a leading energy generation, distribution and transportation company in the U.S. and Canada. Its pipeline network includes the Canadian Mainline system, regional oil sands pipelines and natural gas pipelines. The company also owns and operates a regulated natural gas utility and Canada's largest natural gas distribution company. Additionally, Enbridge generates renewable and alternative energy with 2,000 megawatts of capacity.

While rising interest rates and concerns about funding have constrained stock performance recently, free cash flow and an objective of raising the dividend by 10 per cent annually through 2020 will be reflected in future share performance. Enbridge has a project backlog of $22 billion that will benefit future cash flows. Non-core asset sales of a $3 billion this year and a further $7 billion later will be supportive of their capital plan. The recent pullback in the share price has resulted in a current attractive yield of 6.2 per cent.

PAST PICKS: FEB. 1, 2017

MANULIFE FINANCIAL (MFC.TO)

• Then: $24.98
• Now: $24.78
• Return: -0.80%           
• Total return: 3.42%

AGT FOOD AND INGREDIENTS (AGT.TO)

• Then: $35.71
• Now: $19.42
• Return: -45.61%
• Total return: -44.22%

FORTIS (FTS.TO)

• Then: $41.47
• Now: $41.47
• Return: 0.57%
• Total return: 5.40%

Total return average: -11.80%

PAST PICK UPDATES: We sold Aecon (ARE.TO) late November at $19.55, our average cost was $12.35. Since my last appearance, a client raising cash sold down Alaris Royalty (AD.TO), Canadian Natural Resources (CNQ.TO), Cenovus (CVE.TO), Enercare (ECI.TO), Home Capital (HCG.TO), Stuart Olson (SOX.TO) and Thomson Reuters (TRI.TO).

TWITTER: @SprungInvest
WEBSITE: Sprunginvestment.com