Paul Gardner, partner and portfolio manager of Avenue Investment Management

Focus: REITs, bonds and dividend stocks
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MARKET OUTLOOK
Since the U.S. election, global stock markets have rallied strongly. U.S. profit growth, combined with stronger than expected GDP and employment growth, has help fuel the rally in equities. We would suspect a small correction is coming due the length of this bullish rally. 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 probable 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. Since the U.S. election, 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, not an all-out inflation, is occurring.

TOP PICKS

BCE (BCE.TO)
Of all the telcos, BCE is best positioned in this very competitive market. They have the best free cash flow profile. They’re yielding at six per cent. As well, their Fibe TV expansion and MTB acquisition will allow for greater market share gains against their cable competitors. Their media assets are doing well.

AUTOCANADA (ACQ.TO)
The share price over the past year has fallen dramatically due to the ongoing vehicle sales weakness in Alberta (among other issues). Another negative (that is slowing changing) is that some OEMs will not give clearance for acquired dealerships to be owned in a public entity. Last quarter, the company missed analysts’ expectations, which caused a sell-off. We believe it is a turnaround story that will take several quarters and that this is a good entry point for this unique business.

BAYTEX 6.625% 2022
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 Eagle Ford, 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.
 

PAST PICKS: FEBRUARY 17, 2016

DH CORP. (DH.TO)

• Then: $31.77
• Now: $25.20
• Return: -20.67%
• TR: -16.74%

JPMORGAN CHASE & CO. (JPM.N)

• Then: $58.77
• Now: $88.11
• Return: +49.92%
• TR: +54.16%

AECON CONV 5.5% DEC. 01 2018 (ARE.DB.B)

• Return: 6%

TOTAL RETURN AVERAGE: +14.47%