Michael Sprung's Top Picks: March 17, 2020

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

MARKET OUTLOOK

The past few weeks have not been kind to investors. Markets around the world have been ravaged as a result of the deteriorating economic conditions exacerbated by the COVID-19 virus. We are now in a bear market. It is unclear as to the extent to which a recession may impede economic recovery.

Under these conditions, it is important for investors to avoid the temptation to try to time the market. It is a time to seek investments in companies with strong financial conditions that can weather the storm of a prolonged recession and slow recovery if that’s what occurs. In bear markets, prices fall rapidly and the securities of the financially stronger companies suffer with the weaker companies. The key is to stay focused on the longer term.

As Warren Buffett has stated, "the stock market is a device to transfer money from the impatient to the patient." Conditions will ultimately improve. 

Keep calm and carry on.

UPDATES

Several clients were raising cash or taking tax losses at year-end. Positions were sold in Manulife, ARC, Vermilion, Precision Drilling, Canadian Natural Resources, Suncor, Encana and Newmont Goldcorp.

In June, asset mix rebalancing triggered some minor sales of Royal Bank, Scotiabank, Manulife, CAE and Suncor. One-half the CAE position was sold at $35 in June 2019.

In the last few months, some partial positions in Maulife, Hudbay, Stuart Olson, North West, Canadian Natural and Alaris were sold to raise cash for several clients.

We also sold some Georg Weston, NFI Group, CAE, BCE and Scotiabank for a client raising cash for an outside purchase.

TOP PICKS

GEORGE WESTON (WN TSX)
Last purchase on March 16 at $94.91.

George Weston operates fresh and frozen bakery operations in the U.S. and Canada and food distribution through Loblaws, Canada's leading food retailer. Volumes in the bakery business have been depressed as management goes through the process of rationalizing product offerings to be more in line with consumer trends and optimizing production processes. Going forward, we anticipate that margins in the bakery business will improve as a result of these efforts. Weston's ownership of Loblaws has been creeping up to the 50 per cent level as share buybacks in the market have reduced the float. Weston has a strong balance sheet. The current dividend yield is 2.3 per cent.

ROYAL BANK (RY TSX)
Last purchase on March 16 at $84.45.

RBC is Canada’s largest financial institution, with a market capitalization of around $130 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 U.S. As these investments pay off, the bank should benefit from positive operating leverage leading to greater profitability and future dividend increases. The current yield of 5.1 per cent is attractive and longer term, capital appreciation will accrue to patient investors.

FORTIS (FTS TSX)
Last purchase on March 16 at $48.85.

Fortis is a North American regulated electric and gas utility operating in five Canadian provinces, nine U.S. states and three Caribbean countries. Over the next few years, Fortis is expected to significantly increase its rate base. The company is currently carrying out a capital expenditure program in the order of $18.9 billion that should sustain a 6 to 7 per cent growth rate through 2024. 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 3.9 per cent.

PAST PICKS: MARCH 20, 2019

MANULIFE FINANCIAL (MFC TSX)

• Then: $23.20
• Now: $14.14
• Return: -40%
• Total return: -36%

ARC RESOURCES (ARX TSX)

• Then: $9.70
• Now: $2.90
• Return: -70%
• Total return: -67%

GEORGE WESTON LIMITED (WN TSX)

• Then: $92.45
• Now: $96.36
• Return: +4%
• Total return: +6%

Total return average: -32%

TWITTER: @SprungInvest
WEBSITE: Sprunginvestment.com