Michael Sprung, president of Sprung Investment Management

FOCUS: Canadian large caps

MARKET OUTLOOK:

As the vaccine roll-outs continue, expectations of an economic recovery are building. No two recoveries are exactly alike and given the staged relaxing of restrictions, no one can be certain of the path or speed of the developing return to more normal social and economic conditions. However, as industries reopen, demand for materials and labour will increase. The financial markets have continued to reflect these growing expectations with their upward trajectory and, in many cases, valuations remain at lofty levels. Fears of inflationary pressures have started to come to the forefront, especially in light of the large public and private sector debts accumulated in recent years. Disruptions in supply chains are putting further pressure on prices. Structural differences between employment opportunities and employee qualifications are also present.

As these issues are addressed and demand for goods and services improves, we believe that there will be a perceptible shift into more value related investments from the more growth  oriented stocks.

TOP PICKS:

Royal Bank of Canada (RY TSX) - Last purchase December 2020 @ $104.85

The Royal Bank is Canada's largest financial institution with a market capitalization around $180 billion. The scale of the bank is an advantage in mass-market banking. Management is intent on maintaining their lead and improving market share through investing heavily in technology and its distribution network. Investment is also being directed towards retail growth in the United States. As these investments payoff, the bank should benefit from positive operating leverage leading to greater profitability and future dividend increases. The bank has paid a dividend every year since 1870. As capital restraints are eased following the pandemic, dividend increases and/or share buybacks are likely to recommence. While not the highest, the current yield of 3.4 per cent is attractive and longer term capital appreciation should accrue to patient investors.

Canadian Natural Resources (CNQ TSX) – last purchase August 2019 @ $30.33

Canadian Natural Resources is one of Canada's leading senior producers of oil and gas with operations in Western Canada, the North Sea and offshore West Africa. CNQ is one of the best managed and best capitalized companies in the energy sector with a diversified base of long life, low decline assets. Relative to peers, CNQ has the lowest break even oil price near WTI US$30-31 per barrel. This status affords the company a degree of resilience to underlying commodity prices that few companies in the oil patch can match. In addition, CNQ has flexibility in its capital expenditure programs for mining, exploration and production and thermal projects. Free cash flow is strong at current prices.  At current prices, the stock yields 4.4 per cent.

Cascades Inc. (CAS TSX) – last purchase June 2021 @ $14.45

Cascades is a manufacturer of tissue and paperboard packaging with more than 90 facilities in Canada, the US and Europe. Over the last number of years, Cascades has been paring its diverse portfolio and has recently announced the sale of its European boxboard operations to Apollo Global. Going forward it is expected that the focus will be on tissue and containerboard. The balance sheet has been improving which should lead to further returns to shareholders through dividend increases and/or share buybacks. The valuation is very attractive and the current yield is around two per cent.

PAST PICKS: June 29, 2020

Alaris Royalty (AD-U TSX)

• Then: $12.10
• Now: $16.92
• Return:  +40%
• Total Return: +52%

TFI International (TFII TSX)

• Then: $46.50
• Now: $123.58
• Return:  +166%
• Total Return: +170%

CVS Health Corp. (CVS NYSE)

• Then: $64.42
• Now: $82.65
• Return: +28%
• Total Return: +32%

Total Return Average: +85%