Paul Gardner's Top Picks
Paul Gardner, partner and portfolio manager, Avenue Investment Management
FOCUS: REITs, bonds and dividend stocks
2022 has been a tough year for most asset managers. It is rare for both stocks and bonds to be down significantly at the same time. Avenue has greater confidence in the bond market. The bond market has preempted the Bank of Canada and Federal Reserve, by raising bond rates for the past year from one per cent to roughly three per cent. Most central banks are behind in their tightening schedule. With inflation at roughly 6-8 per cent in both countries, the central banks don’t have the “put” option of lowering rates to save the stock market. Obviously, commodities have performed well due to the Russia/Ukraine war and the after-effects of the pandemic. We believe that we have already entered a recession and that bond markets will push interest rates lower. The interest rate curve will be flat to inverted over the next six months.
The other concern is profitability and asset bubbles. The latter has already been pricked. There are actually some value stocks in the growth sector. The other concern is profitability. Recent earnings releases suggest there is great pressure on margins due to supply chain issues and higher input costs, such as labour. We believe that the S&P 500, on a go-forward basis, should trade around 16x P/E. Stocks will continue to be under pressure.
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ARC Resources is a natural gas producer. It trades at 3x EV/DACF, with NG prices up to $9, the company trades too cheap. It should trade 4.5x and should be around $24. Obviously, there is not enough natural gas in the system and if we see a hot summer in the U.S., this will create a higher price (from here) with the underlying commodity.
Nexus Industrial REIT is an industrial pure-play REIT. Avenue is still very bullish towards the specific sector of industrial REITs. There are a few investments one can make in the Industrial REIT spot. But at a valuation of only 15x AFFO (2023), there is an opportunity for this REIT to outperform other REITs. As well they have an “inside track” to purchase more industrial land from a relationship they have with a large private holder of industrial properties. The company is well diversified.
The investment has elements of growth and defence. The company is acquiring pharmacies that are geographically rural and has communities that are underserved. Valuing now is too cheap. Trading at 9x EV/EBITDA (2023). The defensive nature of retail pharmacy should be attractive at this price point. Acquisitions will eventually “push” valuation higher.
PAST PICKS: April 8, 2021
Loblaw (L TSX)
- Then: $70.03
- Now: $116.23
- Return: 66%
- Total Return: 68%
iShares Canadian Real Return Bond Index ETF (XRB TSX)
- Then: $25.60
- Now: $23.48
- Return: -8%
- Total Return: -7%
Allied Properties REIT (AP-U TSX)
- Then: $42.55
- Now: $38.85
- Return: -9%
- Total Return: -4%
Total Return Average: 19%