Oct 24, 2018

Michael Sprung's Top Picks: Oct. 24, 2018

BNN Bloomberg

Michael Sprung , BNN Bloomberg

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

MARKET OUTLOOK

After nine and a half years of expansion since the financial crisis of 2008, expectations of continuing synchronized expansion have begun to diminish. While the developed economies continue to exhibit progress, those in the emerging markets have begun to falter. Countries with high debt levels are being negatively impacted as central banks tighten monetary conditions through higher interest rates. Given the availability of low rate debt, consumers and governments in the more developed countries will also begin to feel the pinch of higher rates. In addition, trade tensions and tariff disputes are contributing to the uncertain economic environment.

Up to this point, the U.S. market has been the leading global market with strong employment, positive economic growth and growing corporate earnings on the back continued consumer demand and last year's tax cuts. Given the level of accumulated debt and the rapidly increasing federal deficit resulting in large part from those very tax cuts, the momentum of the past year will not likely be sustained. In this environment, we recommend caution.

NOTES

A client was raising cash and we sold down positions in Alaris Royalty, Suncor, ARC Resources, Hudbay, and North West Company. Precision Drilling was sold for an account requiring tax loss.
We sold Aecon late November at $19.55. Our average cost was $12.35
Another client raising cash sold down Alaris, CNQ, Cenovus, Enercare, Home Capital, Stuart Olson and Thomson Reuters.
In March, we sold a portion of our exposure to NFI at $58.60.
In June, asset mix rebalancing triggered some minor sales of Royal Bank, Scotiabank, Manulife, CAE Inc, and Suncor.
Sold Enercare on Aug. 1 at $28.87 when the BPI offer emerged.

TOP PICKS

SUNCOR ENERGY (SU.TO)
Last purchase: March 2016 at $32.91.

Suncor is Canada's largest integrated energy company. The company has an extremely strong upstream asset base and the top downstream business in North America. Suncor is the most profitable Canadian refiner. Recent strengthening in crack spreads has resulted from low feedstock costs and more stable product pricing. The company generates very strong free cash flow, higher than its Canadian and global peers. Ongoing stock repurchases and dividends will return capital to shareholders. Despite these factors, the share price has lagged providing an opportunity for investors.

HUDBAY MINERALS (HBM.TO)
Last purchase: Sep. 8, 2017 at $9.41.

Hudbay provides investors with strong leverage to copper and zinc, both of which have strong longer term supply/demand fundamentals. Hudbay's flagship copper mine, Constancia, is performing well and expectations are Pampacancha will start contributing in 2019. Growth in the next few years will stem from expanded copper, zinc and precious metal production. Gold production is anticipated to improve at Lalor. Rosemont permitting continues, with construction anticipated 2019 to 2021. Surface rights for Pampacancha are expected within the next six months. At current levels, Hudbay is selling at a significant discount to its peers. Recent investor activism (Waterton Global Resource Management) may bring more attention to this stock.

NFI GROUP (NFI.TO)
Last purchase: June 16, 2015 at $15.22.

NFI Group is North America's leading manufacturer of transit buses and motor coaches and the leading distributor of aftermarket parts. Since taking some profits in March 2018 at $58.60, the share price has retreated to where it is attractive to investors. The share price decline may have been indicative of some expansion in industry capacity as well as perceptions that customers may be more constrained going forward, but deliveries and backlog remain firm. At current prices, the shares are attractive.