Full episode: Market Call for Wednesday, January 29, 2020
Paul Gardner, partner and portfolio at Avenue Investment Management
Focus: REITS, bonds and dividend stocks
Markets in 2020 will be more difficult to predict than last year’s one-way bullish movement in bonds and stocks. Valuations are getting high with a risk of overshooting. Notwithstanding current virus fears causing downward moves in stocks and upward moves in bonds, the market seems to be in good shape. Global growth seems to be slowly accelerating and the downward pressure of central bank easing seems to have taken a pause globally.
The Federal Reserve has said they want the U.S. inflation rate to track above 2 per cent. They’ve said that they will not raise interest rates quickly and their policy is very dovish. This should put some pressure on the U.S. dollar to go lower. In order for this to happen global growth must be consistent, if not strong.
Avenue thinks valuations in the U.S. are high due to the FAANG stocks. We think Canada is in good shape and should outperform most global indexes, with the recovery in commodity pricing helping the country’s cause. Certainly the progress of the two pipelines being built will be watched closely. Although bond yields have now dropped, there is a contrarian feeling by Avenue that inflation could re-emerge and that the bond curve could steepen aggressively. Our conviction on this occurring is not high.
CARGOJET (CJT TSX)
Cargojet is a play on Amazon, e-commerce and next-day delivery. The company is the main carrier for Amazon deliveries in Canada. The tech giant is a minority owner of Cargojet and will likely increase its position over the next several years. Recent pilot training and pilot additions have caused margins to suffer, but over time they will be able to add a surcharge on these new government requirements. 2020 should be a strong year for same-day delivery and the company is set up for secular growth. Although shares trade at a 52-week high, we think their business model allows for a continued move higher.
BOARDWALK REIT (BEI-U TSX)
At the time of our purchase, Boardwalk was trading at a valuation of around $145,000 per rental unit versus other apartment REITs that trade closer to $250,000 to $280,000 per rental unit. Some of that substantial discount is caused by the bias towards the Alberta economy. However, we believe that such a large valuation gap is not warranted based on the positive fundamentals around residential apartments. Additionally, Boardwalk has now exhibited several quarters of growth in same-property revenue and the lowering of move-in incentives is starting to boost their profitability.
BERKSHIRE HATHAWAY (BRK/B NYSE)
Berkshire Hathaway is the investment holding company run by Warren Buffett. The shares have lagged behind the broader U.S. market in 2019 as investors grew impatient with the large pile of cash that Berkshire is sitting on, currently around $130 billion. This cash reserve will position Berkshire very well to take advantage of any market dislocations over the coming years and make future acquisitions. Additionally, Berkshire also owns a portion of some high-quality American businesses, including close to 10 per cent of many of the major banks and airlines in addition to Apple and Burlington Northern Santa Fe Railroad. Berkshire also has one of the best run insurance companies in the world in GEICO.
PAST PICKS: MARCH 20, 2019
YELLOW MEDIA 8% 2022 CONVERTIBLE DEBENTURES (YLO DB)
- Then: $101.36
- Now: $104.97
- Return: 4%
- Total return: 12%
WPT INDUSTRIAL REIT (WIR/U TSX)
- Then: $13.81
- Now: $14.20
- Return: 3%
- Total return: 8%
ONEX CORPORATION (ONEX TSX)
- Then: $73.50
- Now: $87
- Return: 18%
- Total return: 19%
Total return average: 13%