Sep 25, 2018

Norman Levine's Top Picks: Sep. 25, 2018

BNN Bloomberg

Norman Levine , BNN Bloomberg

Norman Levine, managing director at Portfolio Management Corp
Focus: North American large caps

MARKET OUTLOOK

We’ve been in a bull market and economic recovery, especially in the U.S. for over nine years. So far this year, the U.S. market has been pretty much the only major world market to provide any meaningful positive returns and even there it hasn’t been as broadly based as we would like. Needless to say, we’re closer to the end of both than the beginning. That said, history shows a few things. First, economic expansions and bull markets generally go longer and higher than most people expect and the gains made late in the cycle can be significant, but they come with increased risk. Second, lots of things cause expansions in markets to end, including interest rates and external shocks. Overvaluation of stocks is rarely the reason. Most times, though, it’s something that comes out of the blue. Third, nobody knows when and why until it actually happens, so take with a big grain of salt the opinions of those who claim to know. It’s prudent, late in the cycle, to give up some of the market gains in order to protect your capital. Finally, the insanity in the trading of cannabis stocks is something I haven’t seen since the peak of the dot-com era and, if memory serves me correctly, it is even more extreme now than it was then.

TOP PICKS

LINAMAR (LNR.TO)
Bought on Sep. 14, 2018 at $58.86.

Linamar is Canada’s second-largest auto parts company. It’s also a player in agricultural equipment (Harvestec in Canada and OROS in Europe) and industrial equipment (Skyjack). Linamar is down 25 per cent from its 52-week high as investors have been worried that it would be a casualty should there be no renewal of NAFTA or if the U.S. imposes punitive duties on auto parts imported from Canada. We believe this creates an opportunity to invest in a company with an impressive long-term growth record at a historically very attractive valuation. Should a deal not be struck, its downside should be limited as it is already trading at a steeply discounted valuation. Its current yield is 0.8 per cent so investors looking primarily for yield should look elsewhere.

UNI-SELECT (UNS.TO)
Bought on Feb. 14, 2018 at $26.16.

Uni-Select is a wholesale distributor of automotive aftermarket parts and paints. It has leading market positions in its three key markets: Canadian aftermarket auto parts, U.K. aftermarket auto parts and U.S. collision paint repair. The stock has been a poor performer since we purchased it seven months ago as it has had multiple earnings misses despite the optimism exhibited by its CEO. Last week, Uni-Select announced that its CEO was departing, that it is reducing its earnings guidance for the remainder of the year, and that it had hired investment bankers to do a strategic review of the company. We believe the result of that review will be the sale of one of its divisions, probably FinishMaster, its auto paint shop division. We think Uni-Select has lots of hidden value and this strategic review will unlock some of it. Interestingly, despite lowering guidance and the CEO departing, the stock is higher since the announcement, signaling the market expects a higher future valuation. Uni-Select has a 1.7 per cent yield and due to the debt it incurred (which it hopes to repay quickly) in its U.K. acquisition, this stock is not suitable for very conservative investors.

NUTRIEN (NTR.TO)
Bought on June 11, 2018 at $69.13.

Nutrien is the merged entity of the former Agrium and Potash Corp. It’s a diversified fertilizer/ag retail company with around two-thirds of earnings from fertilizer production and the rest derived from retail farm centres.

We like the outlook for both potash, where supply/demand is starting to get out of balance and prices are increasing, and for ammonia/urea, where supply appears to be inadequate for the next few years. In addition, Nutrien has a fabulous balance sheet, which gives them lots of opportunities for acquisitions, joint ventures, share buybacks and dividend increases. Analyst estimates appear to be very conservative. The stock currently yields 2.1 per cent.