Michael Sprung, president of Sprung Investment Management

FOCUS: Canadian large cap stocks

MARKET OUTLOOK:

Investors have continued to push prices higher in the markets, albeit with greater uncertainty, as evidenced by greater volatility in market trajectories. On the positive side, the vaccine rollout has begun, bringing with it hope for a return to economic recovery and social interaction. However, many pundits are expressing fears of renewed inflation and higher interest rates, which could result in decreased valuations. In addition, the massive debts accumulated by governments globally will serve to constrain future economic expansion.

The actions taken to fight the pandemic have resulted in extremely high levels of unemployment and the loss of many businesses particularly in the service and hospitality sectors. The degree to which employment will recover is very uncertain. It seems demand for many products and services has built up during the restrictions of the last year. This perception has already resulted in increased pressure on the prices of many commodities and services. We believe that more focus will be brought to bear on valuations in the financial markets as the recovery will inevitably have its unpredictable positive and negative movements ahead. Security selection will be key.

TOP PICKS:

Arc Resources (ARX TSX) – Last purchased at $5.42 in August, 2019

The combination of ARC Resources and Seven Generations creates a company with greater scale and expanded capital allocation flexibility in the Montney region. Production is anticipated to near 340,000 boe/d by 2022. The company should be free cash flow positive by year-end as synergies arise from lower corporate expenses and other operational efficiencies. Debt reduction will be a priority but debt costs should be manageable given an investment grade rating. Debt to cash flow is anticipated to reduce to 1X by year end from 1.9X leaving optionality for future acquisitions, dividend increases and share buybacks. ARC is attractively valued at current levels with a current yield around three per cent.

Hudbay Minerals (HBM TSX) - Last purchased at $6.45 in August, 2019

Hudbay's flagship mine, Constancia, is performing well and the satellite pit at Pampacancha will ramp up production. Gold and zinc production in Manitoba will contribute to HudBay's growth in the near term. Longer term, permitting at the copper project Rosemont in Arizona would be a catalyst for an upward valuation in the stock price. The company has just refinanced $600 million in senior debt at 4.5 per cent, down from 7.625 per cent. While 2021 will be a year of continued investment, the benefits will accrue as economic activity advances.

NFI Group (NFI TSX) - Last purchased at $28.75 in July, 2019

NFI is North America's leading manufacturer and provider of aftermarket services of buses and motor coaches. The company is well positioned to benefit from industry volume recovery and the transition to zero-emission vehicles. The public sector backlog for vehicles remains robust. NFI Group is well placed to supply electric buses, which are anticipated to reach 20-25 per cent of deliveries. NFI is well positioned in sourcing batteries for its electric products that will contribute to meeting U.S. content requirements. Liquidity has improved with the recent $250 million issue of stock. The company is well placed to participate in improving economic conditions. The stock currently yields three per cent.

PAST PICKS: March 17, 2020

Royal Bank (RY TSX)

• Then: $89.10
• Now: $113.90
• Return: 28%
• Total Return: 34%

George Weston (WN TSX)

• Then: $98.52
• Now: $101.34
• Return: 3%
• Total Return: 5%

Fortis (FTS TSX)

• Then: $50.60
• Now: $51.65
• Return: 2%
• Total Return: 6%

Total Return Average: 15%

Twitter Handle: @SprungInvest

Company Website: Sprunginvestment.com