Norman Levine's Top Picks: December 28, 2017

Norman Levine, managing director of Portfolio Management Corp.
FOCUS: North American large caps
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MARKET OUTLOOK

As value investors, we are glad that 2017 is finally coming to an end. As Canadian investors, we are also glad 2017 is ending. Hopefully 2018 will be kinder to us in both ways. While 2017 was kind to growth investors in both the U.S. and Canada, that is unfortunately not how we invest and we were not about to change our long-successful strategy because of a one-year anomaly. Thankfully, as 2017 was ending, value stocks were finally starting to show some life.

For investors who either manage their own money using a value strategy or have professionals managing their money using the value approach, you or your manager didn’t suddenly get stupid. Some years growth stocks perform better, some years value stocks perform better and some years they both perform similarly. 2017 clearly favoured growth investing. While we are not happy that Canadian stocks, as measured by the S&P/TSX Composite Index, were amongst the worst performers in the world, in a way we actually are happy as it demonstrates to investors that you can’t have all your eggs in a Canadian basket and that global diversification is not only a good idea, but a must.

Hopefully, 2018 will be kinder to both value and Canadian investors, but our expectation is for very modest returns, so our emphasis on dividend paying stocks, especially ones that raise their dividends on a regular basis, will be even more important.

TOP PICKS

SNC-LAVALIN (SNC.TO)
SNC-Lavalin is one of the leading engineering and construction companies in the world. SNC is a major player in the ownership of infrastructure (such as its 16.8 per cent ownership of 407 International, a company that owns and operates a toll highway serving the Greater Toronto Area). It has over 50,000 employees in over 50 countries and is continuing to deliver on its strategy of establishing itself as one of the world’s top three engineering and construction companies. We own SNC to take advantage of the infrastructure spending that has been promised in both Canada and the U.S. As well, we see upside from the recent WS Atkins acquisition. SNC trades at a discount to its peer group and we see that discount narrowing as the Atkins integration proceeds. SNC currently yields 1.9 per cent. Originally bought at $42.22 on March 30, 2012 and currently buying for new clients.

ENBRIDGE (ENB.TO)
Enbridge is one of North America’s leading energy delivery companies. Among other operations, it delivers approximately 65 per cent of U.S-bound Canadian crude oil production and approximately 20 per cent of all natural gas consumed in the U.S. It also owns Canada’s largest natural gas distribution company. Enbridge is a stock that everyone used to love and now everyone loves to hate. Enbridge was an investor darling until its acquisition of Spectra Energy earlier this year, which helped diversify Enbridge’s dependency on oil transportation to a more balanced company with large natural gas transportation as well. However, it also increased Enbridge’s leverage and reduced the expected annual dividend growth rate to 10 per cent. Also, the uncertainty over the Line 3 replacement overhangs the stock. We think there is much upside potential to the stock but if all we received in 2018 was the 5.5 per cent yield on the stock, we would not be terribly upset. Enbridge has been held for a very long time and we are currently buying for new clients.

BB&T CORP. (BBT.N)
BB&T is a regional consumer bank headquartered in North Carolina and operating largely along the U.S east coast. While it will be a beneficiary of higher interest rates, it earns approximately 60 per cent of its earnings from its loan book, which works on spreads rather than actual rates. This book is growing at above average rates due to its geographic position in states that are among the fastest growing in the U.S. In addition, the bank has made a few acquisitions of smaller regional banks which will enhance growth in revenues and earnings. We currently prefer U.S. banks to Canadian banks on a valuation and risk basis. BBT’s current yield is 2.6 per cent and we expect its dividend to continue to grow at regular intervals. We have held BB&T for a number of years and are currently buying for new clients.
 

PAST PICKS: FEBRUARY 10, 2017

ARC RESOURCES (ARX.TO)

• Then: $20.74
• Now: $14.77
• Return: -28.78%
• Total return: -26.46%

CARA OPERATIONS (CARA.TO)

• Then: $26.03
• Now: $26.40
• Return: 1.42%
• Total return: 3.11%

KONE OYJ (KNEBV.HE)

• Then: €40.52
• Now: €44.72
• Return: 10.36%
• Total return: 14.58%

TOTAL RETURN AVERAGE: -2.92%

TWITTER: @levinepmc
WEBSITE: www.portfoliomanagement.ca