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

MARKET OUTLOOK

We remain very cautious on the outlook for investments as we start the new decade.

Global geopolitical tensions have spiked since the American raid that killed a prominent Iranian general. The unrest in the Middle East just adds to other concerns surrounding global trade disputes, U.S.-China relations, South Asian border disputes, European fragmentation and decelerating economic growth, among others.

All of this is occurring after a decade of largely positive investment returns during which capital investment has deteriorated as returns have been bolstered by share buybacks and historically low rates. These conditions have led to high security valuations and massive increases in global debt. The stock market has primarily been bolstered by investors chasing securities with high growth rates even if profitability is elusive.

Given these conditions, we anticipate that as the excesses of the past decade come to light, investors will focus more on securities with more solid fundamentals in earnings, balance sheet leverage and management.

UPDATE

• 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.
• 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.
• In the last two months some partial positions in Manulife, Hudbay Minerals, Home Capital, Stuart Olson North West Company, Canadian Natural and Alaris were sold to raise cash for several clients.

TOP PICKS

MANULIFE FINANCIAL (MFC TSX)
Last purchased in August 2019 at $21.69.

Manulife is a leading Canadian-based financial services group with operations in 21 countries. The company is well positioned in Asia, with 50 per cent of its core earnings now stemming from that continent where profitability is greater than in its home market. Manulife is very well capitalized and continues to optimize the balance sheet through debt reduction. A transaction involving the sale of low-profit legacy businesses, particularly LTC, would be a positive catalyst. These steps would further solidify an already strong balance sheet as several billion dollars of capital will become available. After a period of several years, the company is well positioned to continue periodic increases to the dividend. The valuation is attractive at just over book value, with a current yield of 3.8 per cent.

SUNCOR ENERGY (SU TSX)
Last purchased in August 2019 at $37.26.

Suncor is Canada's largest integrated energy company. It has an extremely strong upstream asset base and also the top downstream business in North America. Suncor is the most profitable Canadian refiner. The company generates very strong free cash flow that’s higher than its Canadian and global peers. Over the next two years, it’s anticipated that free cash flow could increase by $2 billion. Ongoing stock repurchases and dividends will return capital to shareholders. At current levels, the stock yields 3.9 per cent.

NFI GROUP (NFI:CT)
Last purchased in August 2019 at $28.75.

NFI Group is North America's leading manufacturer of transit buses and motor coaches and the leading distributor of aftermarket parts. Since taking some profits in March 2018 at $58.60, the share price has retreated and it’s once again attractive to patient investors. The decline may have been indicative of some expansion in industry capacity as well as a recent weakening of industry demand resulting in lower than anticipated backlogs. Alexander Dennis Limited (ADL) in the U.K. has been experiencing declining demand. But Berlin has recently ordered 430 buses, offsetting some of this decline. A stabilization in industry demand through fleet expansions or replacements would provide a catalyst for a greater valuation. At current prices, the stock yields 6 per cent.

PAST PICKS: JAN. 15, 2019

SCOTIABANK (BNS TSX)

• Then: $71.57
• Now: $72.33
• Return: 1%
• Total return: 6%

VERMILION ENERGY (VET TSX)

• Then: $ 32.14
• Now: $ 21.50
• Return: -33%
• Total return: -25%

TC ENERGY (TRP TSX)

• Then: $54.46
• Now: $68.99
• Return: 26%
• Total return: 32%

Total return average: 4%

Twitter: @SprungInvest
Website: Sprunginvestment.com