Oct 3, 2018

Rob Lauzon's Top Picks: Oct. 3, 2018

BNN Bloomberg

Rob Lauzon , BNN Bloomberg

Rob Lauzon, deputy chief investment officer at Middlefield Capital Corporation
Focus: North American equities

MARKET OUTLOOK

We remain positive on equity markets generally, with a continued emphasis on equity income securities in developed markets. Interest rates continue to move higher in the later stages of the current economic recovery, with annualized U.S. GDP growth rates in the 2.5 to 3 per cent range and relatively benign inflation in the 2 per cent range. We expect the U.S. 10-year rate to remain within a range of 3.0 per cent to 3.25 per cent for the foreseeable future.

As a result, we believe one has to be more selective in terms of asset mix in order to generate better risk-adjusted returns. More recently, in light of the foregoing macro factors, there’s been a rotation out of higher valued sectors like technology and into more defensive sectors like utilities/pipelines, healthcare and real estate, all of which have outperformed the broader market since June of this year.

We’ve modestly increased our weighting to these more defensive sectors in recent months, with a focus on our best ideas in each sector in both U.S. and Canada. On Oct. 1, both countries announced that a a trade agreement to replace NAFTA was reached, which is expected to come into effect in early 2019. This has eliminated a major market headwind and associated tariffs on the products from the three member countries. A new trade deal, together with the LNG Canada project being greenlit and a sustained increase in oil prices, is serving to dramatically improve the sentiment toward Canada and Canadian equities.

Emerging markets are in a bear market, reflecting their vulnerability to credit risk and trade war ramifications. Recent economic data confirms China’s economy is slowing and it could be much weaker much sooner than widely expected. We’re watching this dynamic closely for signs of spillover of decreased enthusiasm for U.S. stocks.

TOP PICKS

HORIZON NORTH LOGISTICS (HNL.TO)
Last purchased on Sep. 27 at $2.96.

This company continues to diversify its revenue streams with modular development and we see several positive catalysts on the horizon. Management has expressed interest in growth of their modular solution business in Ontario and the recent positive financial investment decision on LNG Canada’s $40.0 billion, future 3.6 billion cubic feet project provides upside to Horizon’s current valuation. LNG development should boost their camps business. In addition, the company has 14 acres of commercial land in Kitimat for hotel or office development as well as 27 acres suitable for residential development.

TRANSALTA (TA.TO)
Last purchased on July 10 at $6.87.

We feel the market is attributing little value to TransAlta’s core business when its stake in TransAlta Renewables is removed. Its hydro results continue to strengthen and point to their upside in a stronger price environment and post power purchase agreement expiries. Alberta power prices remain strong, while the balance sheet continues to strengthen. Future excess free cash flow could be used for share repurchases or growth opportunities.

ENBRIDGE (ENB.TO)
Last purchased on Oct. 1 at $42.20.

The current valuation of Enbridge including the growing dividend is very compelling. We view the acquisition of the public shares of its four sponsored vehicles as positive as it increases transparency and simplicity for investors. The recent approval of the Line 3 replacement project by the Minnesota Utilities commission helps solidify a major growth project for future earnings growth. Management has executed on its plan of reducing debt with proceeds of non-core asset sales.