Paul Gardner, partner and portfolio manager at Avenue Investment Management

Focus: REITs, bonds and dividend stocks
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MARKET OUTLOOK
Global stock markets have rallied strongly. Canadian equity markets have been left behind despite strong earnings growth. And despite higher than expected GDP growth in Canada, we expect that Canadian equities will outperform its global counterparts for the rest of 2017. We would suspect a small correction is coming due to the length of this bullish rally and the usual summer season weakness. Even after saying that, we do believe that growth in the U.S., Europe and Japan will keep the stock markets healthy. Adding to that health is possible tax reform in the U.S. that will allow companies to flow through their tax savings to higher earnings levels. This should create a virtuous cycle in the short term.

The bond market is complicated. Global interest rates have risen away from emergency lending levels and are now starting to normalize. These levels make it much safer to own medium-term debt such as five- to 10-years. Avenue believes the curve will continue to “normalize” and that reflation will occur in a small measure. Interest rates should be range-bound over the next year. While the Bank of Canada surprised the markets with their recent rate hike, we believe that overnight rate hikes will be modest over the next 12 months. The Federal Reserve will continue to tighten monetary policy through “shrinking the balance sheet” or a raise in its overnight lending rate this fall. The core belief of low or moderate inflation over the near term is still relevant.

TOP PICKS

BAYTEX 6.625% 2022 – $96.50
We bought these bonds through the oil collapse last year. Baytex has two major assets: a heavy oil business in Canada and shale ownership in Eaglesford, Texas. The U.S. asset is one of the richest oil and gas deposits in North America. We believe that this asset more than covers the debt obligations of the bond in case the company gets under stress. We believe a seven-per-cent yield is fair compensation in the high-yield space.

LEON’S FURNITURE (LNF.TO)
We have been a long-term holder of Leon’s. Avenue has been rewarded from the position compounding over 10 per cent annually since 2004. We believe that it is one of the few retail businesses that are not being disrupted by online competition. As well, the company has assets of land value that are not fully valued in the stock price. The recent strength in the Canadian dollar is a tailwind for Leon’s due to the USD purchasing needs.

GILEAD SCIENCES (GILD.O)
The health-care sector is cheap. Gilead trades at 9x P/E. Concerns about patent expiry and a very large cash position has caused the stock to slide. We believe that the sector and the stock are mispriced relative to other sectors.
 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
BAYTEX 6.625% Y  Y Y
LNF Y Y Y
GILD Y Y Y


PAST PICKS: FEBRUARY 17, 2016

DH CORP (DH.TO) – Purchased by Vista Equity Partners on June 15, 2017

  • Then: $31.77
  • June 15, 2017: $25.49
  • Return: -19.76%
  • Total Return: -19.76%

JPMORGAN (JPM.N)

  • Then: $58.77
  • Now: $92.32
  • Return: 57.08%
  • Total Return: 63.33%

AECON CONVERTIBLE DEBENTURES 5.5% DEC. 01, 2018

  • Total Return: 7%

TOTAL RETURN AVERAGE: 16.85%
 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
DH N N N
JPM Y Y Y
AECON 5.5% N N N


FUND PROFILE: AVENUE BOND COMPOSITE

PERFORMANCE AS OF JULY 31, 2017:

  • 1 month: Fund -0.90%, Index* -1.90%
  • 1 year: Fund 1.0%, Index* -2.70%
  • 3 years: Fund 2.6%, Index* 2.90%

* Index: TMX Canada Universe Bond Index


TOP HOLDINGS AND WEIGHTINGS

  1. Canada 1.5% June 2026: 8%      
  2. NBC Dep NT 2.105% Mar 2022: 6%
  3. New Brunswick 1.55% May 2022: 5%
  4. Enbridge 3.19% 2022: 5%
  5. Suncor 3.1% Nov 2021: 4%


WEBSITE: www.avenueinvestment.com