Paul Gardner, partner and portfolio manager at Avenue Investment Management
Focus: REITS, bonds and dividend stocks

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MARKET OUTLOOK

Despite all the recent volatility, the global economy is growing above 3 per cent. Unemployment is at cyclical lows in Canada and the U.S. Business reform through taxes and regulation is favouring public companies listed in America. Canada is challenged by going the opposite direction with regards to these issues and this is causing stress to the country’s markets. Canada does benefit indirectly through stocks that have exposure to the U.S., but headwinds from higher taxes and environmental regulation lowers the ultimate valuation of Canadian markets.

Although this is happening, we at Avenue feel the discount between Canadian stocks and American stocks is too large. We believe with the recent commodity rally that has occurred coupled with this implied discount allows us to favorably invest in Canadian names. Further near-term issues are the ongoing Trump “trade war” headlines that give the markets a negative sentiment short term. With regards to the bond markets, we believe that the U.S. Federal Reserve will lift overnight rates at least two times, where the Bank of Canada will only raise once. Bond rates should stay in a tight range for the near and medium term.

TOP PICKS

SMART REIT (SRU_u.TO)

A redevelopment program in north Toronto gives a growth element to this conservative Walmart-anchored REIT. Tenants and properties are of high quality. Good Management

YELLOW PAGES CONVERTIBLE 8% 2022 (YPGdb.TO)

This is an ongoing restructuring story. Over the past few years, Yellow Pages has tried to grow its digital business to offset its declining print business. After the company restructured, it needed to get its capital structure “right sized.” Over time, they’ve paid down a significant portion of outstanding debt. The company is still struggling with its digital media platforms. One benefit the company enjoys is free cash flow. Last quarter, they drastically cut expenses and revenue dropped, but free cash flow increased substantially. We believe that this is a debt story and not a stock opportunity. We believe the pay down of its senior debt will allow the convertibles (in a few years) to be the only outstanding debt instrument they have. With a 10 per cent yield and little bonds outstanding, we believe owning the debt is a great risk/reward investment that favours yield investors.

ALIMENTATION COUCHE-TARD (ATDb.TO)

Couche-Tard recently released strong improved earnings on its last quarter. We believe that the convenience store segment will outperform the traditional grocery chains. Synergies from its acquisition of CST and Holiday will allow margin expansion. Gas margins should normalize and momentum should continue on the stock. We believe this company trades cheap relative to its growth patterns.

PAST PICKS: AUG. 3, 2017

BAYTEX 6.625%, 2022 —12% current total return

LEON’S FURNITURE (LNF.TO)

• Then: $18.07
• Now: $18.29
• Return: 1%
• Total return: 4%

GILEAD SCIENCES (GILD.O)

Earnings stalled out and investment didn’t fully replace what was now rolling off. It has drug patents that are expiring, and their HEPC drug is curing people.

• Then: $74.37
• Now: $77.83      
• Return: %
• Total return: 8%

Total return average: 8%

WEBSITE: www.avenueinvestment.com