Full episode: Market Call Tonight for Wednesday, March 20, 2019
Paul Gardner, partner and portfolio manager at Avenue Investment Management
Focus: Dividend stocks, REITs and bonds
Both the stock and bond markets have had tremendous starts to the year due to revised expectations of central bank policy, regaining most (if not all) the losses from 2018. A majority of central banks around the world have stopped increasing short-term rates; this is due to the easing of inflation pressure and an understanding that the global economy is slowing. The result is a lift for stocks and bonds.
With bond rates dropping a further 0.5 per cent from the fall, we believe that Canadian markets are cheap compared to the rest of the world and will continue to outperform this year. Although the Canadian economy is sluggish due to weak oil and gas prices in Alberta, overall the country is in relatively good shape. Household debt is a concern, but should be manageable due to interest rates that are still low from historical standards.
Valuations for stock markets are reasonable. As with bonds, the Canadian stock market is trading cheaply relative to global indexes. At Avenue, we believe that capturing high-yield dividends from large-cap companies such as Enbridge, Bell or the banks gives us a 4 to 6 per cent yield pick-up. By taking advantage of this dynamic, the dividends are providing a good yield while we wait for the markets to grind higher over the midterm.
YELLOW MEDIA 8% 2022 CONVERTIBLE DEBENTURES
The company continues to reposition itself from print media to the digital space with cost containment, corporate restructuring and modest growth spending. Growth is limited due to ongoing competitive pressure from the likes of Facebook and Google. Most importantly their balance sheet, which was overleveraged, is now finally stabilizing and becoming closer to debt-free. Their senior debt outstanding will be retired over the next few years due to the company’s strong free cash flow model.
It’s important to emphasize that Avenue likes the convertible debt as a bond with an 8 per cent yield and not Yellow Media’s stock. As bondholders, we’re higher on the capital structure than equity holders in case the company fails — which is not a likely possibility.
WPT INDUSTRIAL REIT (WIR_u.TO)
This REIT’s assets exclusively offer exposure to industrial real estate in the U.S. We believe WPT is cheap relative to its sector and industry. The company trades at a discount to its peer group on a price to adjusted funds from operations (AFFO) basis. The company has the capital to grow and has done several reorganization announcements that positively favour unit holders. Industrial REITs have the best fundamentals in the sector overall.
ONEX CORPORATION (ONEX.TO)
This quasi-private equity firm trades at a significant 12 per cent discount to its net asset value (NAV). Historically, it’s traded at a premium as high as 15 per cent. Its collection of assets and holdings offers a blend of defensiveness and a management team that’s shown a strong talent to pick undervalued assets and reposition them for higher profitability. Onex also has a high defensive cash weighting, waiting for better opportunities to deploy the cash. The cash drag on its portfolio is actually the reason it’s traded lower. We believe the stock will be revalued over the next year or two.
|YELLOW MEDIA DEBENTURES||Y||Y||Y|
PAST PICKS: FEB. 7, 2018
- Then: $56.71
- Now: $58.71
- Return: 4%
- Total return: 11%
INTER PIPELINE (IPL.TO)
- Then: $22.79
- Now: $22.07
- Return: -3%
- Total return: 5%
LEON’S FURNITURE (LNF.TO)
- Then: $17.63
- Now: $14.03
- Return: -20%
- Total return: -17%
Total return average: -0.3%
Avenue Bond Portfolio
Performance as of: Feb. 28, 2019
- 1 month: 0.5% fund, 0.2% index
- 1 year: 3.4% fund, 3.6% index
- 3 years: 3.2% fund, 2.2% index
INDEX: Canadian Universe Bond Index.
Returns are net of fees, distributions and annualized.
TOP 5 HOLDINGS
- Canada 1.5% 2026
- Enbridge 3.19% 2022
- Bank of Nova Scotia 2.62% 2026
- National Bank 2.105% 2022
- Prov New Brunswick 1.55% 2022