Jan 15, 2019

Michael Sprung's Top Picks: Jan. 15, 2019

BNN Bloomberg

Michael Sprung , BNN Bloomberg

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

MARKET OUTLOOK

2018 started with a great deal of investor optimism. Global economies were growing, U.S. tax cuts were predicted to be a boost to earnings, interest rates were still at low levels and expectations were that international trade tensions would be reasonably resolved. What a difference a year makes!

As 2018 closed, global economies are no longer synchronized in a positive manner (some have actually contracted). Tax cuts have boosted earnings in the U.S., but a lot of the returns to shareholders have been in the form of stock repurchases at high valuations. The prospects for continued accelerating earnings have been diminished with no great catalysts in sight. Interest rates have increased causing concerns over debt burdens. Trade disputes, particularly between the U.S. and China, have contributed to market jitters.

Expansions and contractions are normal phenomena in the market cycle. It isn’t atypical to see a sudden and dramatic end to advancing markets. It’s entirely possible the current selloff may continue for some time, but we see some positive outcomes. Valuations are dropping with prices. Where we have been having difficulty finding attractive opportunities, more are now coming into focus. Investors will now focus more on longer-term, fundamental valuations.

Invest in solid, well financed and managed companies. While we continue to advise caution, invest incrementally as you identify candidates.

UPDATES

A client was raising cash and we sold down positions in Alaris Royalty, Suncor, Barrick Gold, Hudbay Minerals and North West Company.
Precision Drilling was sold for an account requiring tax lost.
Another client raising cash sold down Alaris Royalty, Canadian Natural Resources, Cenovus, Enercare, Home Capital Group, Stuart Olson and Thomas Reuters
In March, we sold a portion of our exposure to NFI Group at $58.60.
In June, asset mix rebalancing triggered some minor sales of Royal Bank, Scotiabank, Manulife Financial, CAE and Suncor.
We sold Enercare on Aug. 1 at $28.87 when Brookfield Infrastructure Partners offer emerged.

TOP PICKS

SCOTIABANK (BNS.TO)
Last purchased on September 2016 at $69.85.

The Bank of Nova Scotia 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. To date there has not been any apparent deterioration in credit quality. Given Scotiabank’s geographic footprint, operations are in areas sensitive to commodity prices that have recently exhibited higher levels of volatility. The current yield of 4.8 per cent is attractive as are the relative valuation parameters to its peers.

VERMILION ENERGY (VET.TO)
Last purchased on April 2018 at $45.51.

Vermilion Energy has interests in oil and gas producing properties in Western Canada, France, Germany, the Netherlands and Australia as well as a substantial non-operated interest in the Corrib natural gas field off the northwest coast of Ireland. Vermilion is well managed with a solid balance sheet. At today's commodity prices, Vermilion generates free cash flow that supports the current yield of 8.6 per cent. Its geographically diversified operations should contribute to a growing production profile over the next few years. The energy sector has been particularly weak over the past year, leading to some very attractive valuations for a number of companies.

TRANSCANADA (TRP.TO)
Last purchased on December 2015 at $46.63.

TransCanada is one of the largest energy infrastructure companies in North America, focusing on natural gas pipelines, liquids pipelines and energy (mainly power generation). Its key natural gas pipeline assets of over 67,000 kilometers include the main Alberta gas gathering system (the NGTL), the Canadian Mainline, ANR, Columbia Gas and Mexico. Its liquids pipeline network includes the Keystone pipeline system. TransCanada’s energy business consists of 10,000 megawatts of generation capacity in Canada and the U.S. and 118 billion cubic feet of unregulated gas storage. That said, it has announced the sale of its U.S. merchant power portfolio. TransCanada is working to develop $25 billion of near-term secured growth projects. The company sees 8 to 10 per cent dividend growth per year out to 2020. At current prices, the stock is yielding 5.1 per cent.