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

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MARKET OUTLOOK

Until recently, markets shrugged off political and geopolitical developments. However, investors were shaken in the latter part of the second quarter as tensions intensified regarding global trade in reaction to a series of tariffs and counter tariffs that were enacted. Global stock market volatility increased as investors exited positions in June and markets lost some of the gains that had been achieved earlier. It’s becoming increasingly apparent that the U.S. is no longer going to accept what it views as asymmetrical trade and military alliances as the status quo. This state of affairs has enormous implications for the U.S. and its trading partners. Corporate profits would be severely impacted by a prolonged trade war. In this environment, we would advise caution. Value rather than momentum will become more important in stock selection as investors seek to minimize risk on the downside. Investors should continue to seek well financed, well managed companies that are selling at attractive price levels.

TOP PICKS

MANULIFE FINANCIAL (MFC.TO)
Last purchase: May 2, 2018 at $23.47.

Manulife is a leading Canadian-based financial services group with operations in Asia, Canada and the U.S. The company is well positioned in Asia, where they’re experiencing high growth and profitability: 50 per cent of Manulife's core earnings stem from Asia. Under Roy Gori's leadership, a new round of balance sheet optimization is underway emphasizing a more aggressive approach to dealing with less profitable legacy businesses. Manulife has been lagging its peers recently, likely a result of some anticipated charges during this restructuring period. But we anticipate that Manulife will benefit from rising rates, a flattening of the yield curve and stronger results from Asia and wealth management. A renewed emphasis of cost efficiencies will improve margins over the next few years. The current yield of 3.7 per cent is attractive.

ARC RESOURCES (ARX.TO)
Last purchase: March 9, 2016 at $18.72.

ARC is one of Canada's leading conventional oil and gas companies, with operations in western Canada. Management is focused on the development of ARC's high-quality, long-life assets. Liquids-rich opportunities in the Montney offer the prospect of higher margins. The expansion at Dawson Phase III was completed in mid-2017. Future growth in production will arise from completion of projects in Sunrise (mid-2019) and Dawson Phase IV in 2020. ARC has one of the strongest balance sheets amongst its peers, with net debt to cash flow below 1.5 times. The stock currently yields 4.1 per cent.

FORTIS (FTS.TO)
Last purchase: May 2, 2018 at $42.45.

Fortis is the largest investor-owned gas and electric distribution utility in Canada, with operations in the U.S. and Belize.  Over the next few years, Fortis is expected to significantly increase its rate base. Management anticipates capital expenditures in the order of $12.9 billion over the next five years. 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 4.0 per cent.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
BNS Y N Y
CNQ Y N Y
HBM Y N Y

 


PAST PICKS: JUNE 7, 2017

BANK OF NOVA SCOTIA (BNS.TO)

  • Then: $76.64
  • Now: $75.99
  • Return: -1%
  • Total return: 4%

CANADIAN NATURAL RESOURCES (CNQ.TO)

  • Then: $38.54
  • Now: $47.70
  • Return: 24%
  • Total return: 28%

HUDBAY MINERALS (HBM.TO)

  • Then: $6.67
  • Now: $6.79
  • Return: 2%
  • Total return: 2%

Total return average: 11%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
MFC Y N Y
ARX N N Y
FTS N N Y

 

TWITTER: @SprungInvest
WEBSITE: Sprunginvestment.com