Paul Gardner's Top Picks
Paul Gardner, partner and portfolio manager, Avenue Investment Management
FOCUS: REITS, fixed income and dividend stocks
2022 will continue to be challenging. The economic environment is difficult, pivoting between out-of-control inflation and an almost certain recession event. This makes expensive valuations in the stock market hard to justify due to higher interest rates and earning estimate headwinds.
Avenue believes that we will see continuing downward pressure on S&P 500 earnings due to huge front-loaded compatibles from last year. Downward pressure also comes from labour and input price pressures due to the tightness of the labour market and the recent supply chain issues that we are facing globally. As well, central banks might be close to slowing interest rate hikes but are not even close to finishing withdrawing liquidity from the system.
We believe that the bond market is now “safe” to enter. With most bonds now earning over four per cent, we believe there is enough compensation for future inflation risks. Over the mid-term, we do think that the global economies will be more focused on future deflation effects and not higher inflation.
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It has unique asset classes in real estate and storage facilities, which are not impacted by the cyclical economy. Actually, it does the same or better in a recession due to people that either can’t sell their stuff or need to store their goods until sold. The self-storage business has proven to be a long-term outperformer. Avenue believes that earnings growth can be compounded at a double digit-pace.
Regardless of market performance, the apartment rental market is the place to be in real estate. The fundamentals are in good shape with apartment rents or replacement rents going much higher (despite the myriad of rent controls in place), we feel that this is the beginning of multi-year double-digit annual returns. The REIT trades at a discount to NAV and its overall balance sheet is in good shape. As well the REIT yields a nice 3.5 per cent.
The other asset that continues to do well through the pandemic is industrial real estate. Nexus is a small cap that is growing and acquiring Canadian industrial properties. Leasing spreads are strong in Ontario and Quebec markets. Nexus leasing spreads offer a future bump to its margins or cash flow, as maturities roll off into higher rental prices. The company has a unique relationship with a private real estate owner that develops and owns industrial properties all over Canada.
PAST PICKS: January 12, 2021
Leon’s Furniture (LNF TSX)
- Then: $20.94
- Now: $16.00
- Return: -24%
- Total Return: -15%
Boardwalk REIT (BEI.UN TSX)
- Then: $34.37
- Now: $46.27
- Return: 35%
- Total Return: 40%
WPT Industrial REIT (WIR-U TSX) (Oct. 20 2021, the company was acquired by Blackstone REIT)
- Then: $15.14
- Oct. 19th 2021: $21.80
- Return: 44%
- Total Return: 48%
Total Return Average: 24%