Robert McWhirter, president of Selective Asset Management
FOCUS: Canadian dividend and small-cap stocks
MARKET OUTLOOK:
The International Monetary Fund recently noted in their semiannual World Economic Outlook that the world’s economic growth contracted by 3.3 per cent in 2020. It’s expected to grow by six per cent in 2021, with further growth of 4.4 per cent in 2022. John Normand of J.P. Morgan’s Cross Asset Strategy team noted on April 9th: “The progression from Q1 to Q2 is unfolding with both continuity (higher equities, tighter credit) and change (weaker oil, stable bond yields, stalled value rotation). Neither bond yields nor oil should stay down for long, which are amongst the reasons to think the value rotation has paused rather than peaked.”
There are no changes to core views: global growth booms; rich markets become richer; equities and credit manage higher yields better than the EM (Emerging Markets) complex: and inflation presents the greatest systemic risk. In a higher-inflation environment, natural resources and infrastructure are the most likely to see their return advantage to public markets widen.
We continue to believe that equities will continue to outperform bonds over the coming year.
TOP PICKS:
Canadian Tire sells home goods, sports equipment, apparel, footwear, automotive parts and accessories through 1,740 locations across Canada. Canadian Tire has a 2.5 per cent yield, a low 11 per cent payout of four quarter trailing cash flow and an impressive 17.1 per cent free cash flow yield. Canadian Tire’s free cash flow grew 517 per cent to $1.9 billion on a four quarter trailing basis. Canadian Tire reported results on February 18:
Sales per share were up 14 per cent and earnings were up 53 per cent, nine per cent above analysts’ expectations. Their earnings are forecast to grow 14 per cent to $15.72 in 2022, resulting in a 11.7X forecast p/e multiple.
Analysts’ earnings estimates for cy 2021 were revised UP by two per cent in the past 90 days. Canadian Tire’s trailing ROE is 20.3 per cent (A-). The consensus price target from eight analysts of $199.00 implies 11 per cent potential upside.
Microbix produces antigens used in immunoassays and Quality Assessment and Proficiency (QAPs™) testing products. Microbix recently introduced Viral Transport Media (VTM), used in vials to transport nasal swabs to labs for COVID-19 testing. Sales are expected to more than double in 2021 to $25.3 million and grow a further 32 per cent in 2022 to $33.5 million. COVID-19 testing is expected to continue to be significant in the coming years for employees and travelers. Even if COVID testing slows, HPV and other tests that have been delayed could pick up the slack. On March 31, Tony Popowich, technical analyst at IA Securities, noted: “Microbix has broken out of both a five-year base and a secondary accumulation zone. The base breakout targets intermediate-term technical upside back to the 2014 high at $0.90”, implying 64 per cent potential upside.
West Fraser Timber produces lumber, laminated veneer lumber, medium-density fiberboard, plywood, pulp, and newsprint. West Fraser has a 0.8 per cent yield and a low four per cent payout of four quarter trailing cash flow. West Fraser’s free cash flow grew 300 per cent year-over-year to $1.78 billion on a four quarter trailing basis giving an attractive free cash flow yield of 14.4 per cent. In Q3 sales per share grew 50 per cent while cash flow per share grew 588 per cent. West Fraser’s earnings per share are forecast to grow 35 per cent to $16.00 in 2021 giving a 2021 price/earnings multiple of 6.4x. Analysts’ EPS estimates for 2021 were revised up by 88 per cent in the past 90 days. West Fraser’s forecast ROE for cy 2021 is 27 per cent (A-). On April 5, Tony Popowich, technical analyst at IA Securities, noted West Fraser could have “a sustained breakout [that] would project further technical upside in excess of $115.00.”, implying 14 per cent potential upside.
PAST PICKS: April 24, 2020
Alamos Gold (AGI TSX)
- Then: $11.39
- Now: $10.27
- Return: -10%
- Total Return: -9%
Boralex (BLX TSX)
- Then: $26.88
- Now: $41.01
- Return: 53%
- Total Return: 55%
Cascades (CAS TSX)
- Then: $13.88
- Now: $14.12
- Return: 2%
- Total Return: 4%
Total Return Average: 17%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| AGI TSX | N | N | N |
| BLX TSX | N | N | N |
| CAS TSX | N | Y | Y |
Website: www.Selectiveasset.com
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