Michael Sprung, president of Sprung Investment Management
Focus: Canadian large caps
We are only a few days away from the U.S. presidential election, and what a tumultuous campaign period it has been! While the Americans will decide which candidate is disliked the least, investors hoping for a calmer period post-election may be sadly disappointed. We have observed some disturbing trends in the current global political environment calling into question the merits of free trade and globalization as politicians exploit unrest in the electorate. This trend has been evident during the Brexit campaign and the American election. This backlash has also been evident in the coverage of trade negotiations, notably CETA and TPP. Geopolitical tensions continue to fester in many parts of the globe: Euro disputes and financial instability in addition to the migration crisis, tension in the Middle East, Russian hegemony in the Ukraine and Syria, Chinese hegemony in the South China Sea, etc.
Within this environment, asset prices have been bid up on the back of easy money and debt as central banks have intervened in the economy through maintaining low interest rates. Governments have reacted with more regulation and interventions, as we have witnessed in the Canadian housing market. For the most part, stock markets have exhibited great resiliency in the face of anemic growth, rising protectionism and increasing regulatory constraints.
All of these factors lead us to be cautious in the current market environment. Investors can best position themselves in well-diversified portfolios consisting of financially strong, well-managed companies. Technology will continue to generate great opportunities and great dislocations. Rapid technological advances are reshaping many industries. These changes will cause greater stress as the skills required for employment evolve and leave many people behind. It is during these periods of great uncertainty and disequilibrium that investors must direct their efforts towards enhancing portfolio positions as opportunities are identified.
HOME CAPITAL GROUP INC. (HCG.TO) – Last purchased December 18, 2015 at $27.08
Home Capital Group through its principal subsidiary, Home Trust Company, offers deposit, mortgage lending, retail credit and credit card issuing services across Canada. The stock has pulled back as the company has been impacted by new regulatory restrictions and operational issues with some loan origination issues. Management has been proactive with the origination issues and capital is being deployed to position the firm going forward with a focus on cost control as well as systems. The regulatory changes are going to have an impact on the whole industry that may temper near-term growth prospects. HCG is well financed and at current levels the stock has a yield of 3.7 per cent.
CENOVUS ENERGY INC. (CVE.TO) – Last purchased March 3, 2015 at $22.05
Cenovus is an integrated oil company focused on the development of bitumen assets in Alberta. It has a 50 per cent interest in a joint venture with ConocoPhillips as well as 50 per cent interests in two oil refineries. The company has a strong balance sheet, disciplined expense control and great operating leverage on an improved commodity environment. In the interim, Cenovus has the wherewithal to continue with the enhancement of its properties.
THE NORTH WEST COMPANY (NWC.TO) – Last purchased March 3, 2016 at $31.79
The North West Company is a leading retailer of food and everyday products to rural communities and urban neighbourhoods in Canada, the Caribbean, Alaska and the South Pacific. NWC's core markets in Northern Canada have been challenged recently by stagnant consumer incomes. This should be relieved to some extent as higher universal child care benefits are paid and the roll out of Nutrition North Canada, which will occur in 22 of NWC's markets. Competition remains strong in Giant Tiger's markets. Alaskan stores were impacted by a reduction in 2016 Permanent Dividend Fund payouts, but this should be a one-time item. Going forward, we expect some recovery in the north and Alaska. The company is well financed and currently has a yield of five per cent.
PAST PICKS: OCTOBER 14, 2015
ALARIS ROYALTY (AD.TO)
Alaris has had its problems over the last few quarters with a number of their investee companies. While a few of them have been resolved or restructured, there are still a couple of workouts to complete. It would appear that a number of investors have given up and sold, driving the stock to levels that I consider overdone. There have been a number of positive developments, including amendments to their credit facility and the initiation of their small-cap division. I would expect the dividend to remain at current levels at this point and the stock should recover as more positive developments ensue over the coming quarters.
- Then: $27.07
- Now: $17.94
- Return: -33.72%
- TR: -28.98%
HUDBAY MINERALS (HBM.TO)
HudBay has lagged its peers but is now nearing the point where sustaining capex demands are waning and productivity is increasing. Going forward, I believe that we will see better results reported that will support higher stock-price levels.
- Then: $7.12
- Now: $5.91
- Return: -16.99%
- TR: -16.68%
AECON GROUP (ARE.TO)
After Aecon reported disappointing results on Wednesday, the stock price has come off significantly. While revenues and margins came in lower than expected, the short- and mid-term backlogs also declined. In our view, the reaction in the stock price has been exaggerated. Longer-term backlogs are robust and Aecon has a good balance sheet with a strong financial position. Prospects over the coming years are growing. We would consider this setback an opportunity for longer-term investors.
- Then: $14.08
- Now: $13.25
- Return: -5.89%
- TR: -3.33%
TOTAL RETURN AVERAGE: -16.33%
PAST PICKS UPDATE
AGT on March 8 2016 at $36.68: Reducing weight
ECA on December 7 2015 at $9.02: Tax loss selling
CM on Jan 3 2016 at $91.21: Raising cash for one situation