Full episode: Market Call for Friday, September 21, 2018
Rob Tetrault, senior vice-president, portfolio manager and head of the Tetrault Wealth Advisory Group, Canaccord Genuity
Focus: North American large caps
Looking ahead in Canada beyond a relief rally in a potential NAFTA deal, elevated household and corporate debt leverage in a context of rising bond yields calls for some caution. It’s important to remember that long-term valuations are based on multiples and those multiples should take into account a likely increased cost of capital in a rising rate environment. Additionally, the length of the U.S. bull market is starting to weigh in on investors’ minds, and we’re always prudent in investing in looking for alternatives and asset classes that have no (or a reduced) correlation to typical stock markets.
Energy stocks continue decoupling with oil prices as differentials blow out, banks are being challenged by flattening bond-yield curves and another prominent Canadian darling, Dollarama, has plunged under the weight of softening same-store sales. Consumers in Canada are going through the mother of all wallet squeezes with the surge in prices for essentials far outstripping wage inflation. To make things worse, bond yields are rising anew, with U.S. 10-year yields closing near the 3 per cent resistance. Having said all this, overall fundamentals in corporate earnings growth can continue to propel the market to new highs.
Alphabet continues to control information and is going to figure out a way to capitalize on ways that we can’t understand yet. Their growth will continue and the premium that we’re currently paying for growth in my view isn’t that high.
BROOKFIELD ASSET MANAGEMENT (BAMa.TO)
They manage a ton of global assets, real estate and infrastructure. I like a lot of the Brookfield names: Infrastructure, Property — they’re all good. But since I can only pick one, I pick the one with a very stable consistent recurring cash flow and one that will be defensive in a bad market.
SURGE ENERGY (SGY.TO)
Eight consecutive quarters of production growth, some serious cash flow growth over the past while, and the market is refusing to give Surge Energy credit for that. I believe there’s a catch-up trade to be had here. The stock has moved lockstep with crude for a long time, but now that has stopped, trading at a serious discount in my view. They have high-quality assets and are actually paying a dividend (only paying out 20 per cent). I’m bullish long term on energy producers, so why not own the one that has had the best and most consistent cash flow growth – that’s what the market will eventually measure.
PAST PICKS: MARCH 9, 2018
BOYD GROUP INCOME FUND (BYD_u.TO)
I continue to like this Boyd Group. Strong management, the company is in my backyard and they’ve managed to pick up a bunch of acquisitions since forever. The big risk here is self-driving cars entering the market in North America and the reduction in accidents. Remember what happened with Yellow Pages? We’re a long way away, but that’s something that could happen to Boyd.
- Then: $109.86
- Now: $128.26
- Return: 17%
- Total return: 17%
DISTINCT INFRASTRUCTURE GROUP (DUG.TO)
We sold off a portion of Distinct when it rallied in late March/early April, and sold the rest last week. The reason I sold off is because management showed us in a very clear way that they’re not able to deliver and are likely in over their head with their acquisitions. I lost faith in management.
- Then: $1.45
- Now: $0.60
- Return: -59%
- Total return: -59%
ARTIS REIT (AX_u.TO)
I continue to believe it is way underpriced and is starting to look attractive to get bought out by another large-cap REIT. If you do’nt own real estate in your portfolio, now is a great time to be taking some risk off the table and moving into REITs. This one is right in my backyard, so I know of some of the great projects they have going on now. I’m not super enamored with their recent selling off of some Alberta properties at dilutive prices, but I guess they were sick of being in the penalty box. Numbers should improve quarter by quarter.
- Then: $13.72
- Now: $12.10
- Return: -12%
- Total return: -8%
Total return average: -17%