Robert McWhirter, president of Selective Asset Management
Focus: Canadian dividend and small cap stocks

MARKET OUTLOOK

Due to concerns of the impact of COVID-19 on people and the expected slowing of economic activity, the S&P/TSX index declined 37.8 per cent from Feb. 20 to March 23. As the rate of growth of COVID-19 cases appears to have peaked, the index has recovered 45 per cent of the decline since March 23.

On March 30, based on our multi-factor quantitative model, we bought a combined weight of 13.3 per cent in shares of Barrick Gold and Franco Nevada in the Canadian Dividend Strategy. Over the next 12 months, central banks are expected to purchase US$5.5 trillion in assets to support the credit markets.

On April 15 hedge fund manager Ray Dalio was interviewed by Bloomberg News. He was concerned about how the value of money as a store hold of wealth would be affected by the huge purchase of assets and suggested gold would benefit.

On April 22, CIBC Capital Market technical analyst Sid Mokhtari said that gold stocks are at the cusp of a breakout and that the GDX (Gold Miners ETF) has an additional 15 to 25 per cent upside potential.

While COVID-19’s long-term impact on people and the economy is unknown, some technical analysts believe this is the stock-buying opportunity of a generation. Although equity prices may give up some of their near-term gains, we expect North American equity prices and gold to move higher over the next 12 months.

TOP PICKS

ALAMOS GOLD (AGI TSX)

Alamos Gold is a Canadian intermediate gold producer that operates mines in Ontario and Mexico. On Feb. 19, Alamos reported a 13 per cent year-over-year increase in sales per share and 147 per cent year-over-year earnings growth. Free cash flow grew 100 per cent year over year.

2020 and 2021 earnings estimates were increased by 15 and 46 per cent respectively in the past 90 days, and cash flow per share is forecast to grow 41 per cent in 2021. Alamos appears attractively priced as it trades at six times enterprise value to 2021 cash flow estimate. The consensus $12 target price from eleven analysts implies 11 per cent potential upside.

BORALEX (BLX TSX)

Boralex develops, constructs and operates renewable energy power including wind, hydroelectric, thermal and solar. On Feb. 28, Boralex reported a nine per cent year-over-year increase in sales per share and 217 per cent year-over-year earnings growth. Free cash flow grew 162 per cent year over year, giving a 4 per cent free cash flow yield. 2020 and 2021 earnings estimates were increased by 18 per cent and 22 per cent respectively in the past 90 days. Earnings per share are forecast to grow 153 per cent in 2020 and 33 per cent in 2021.

Monica Rizk of Phases and Cycles has targets of $33 to $35, implying 18 to 25 per cent upside potential.

CASCADES (CAS TSX)

Cascades is a paper and packaging company that produces, converts and sells packaging and tissue products composed primarily of recycled fibres. On Feb. 27, Cascades reported 30 cents of earnings per share, 12 per cent above expectations. Free cash flow grew 678 per cent year-over-year, giving an attractive 10.2 per cent free cash flow yield. Trading at 0.68 enterprise value (EV) to trailing 12 month (TTM) sales (B+) and 5.3 times EV to TTM EBITDA (B-), Cascades appears attractively priced.

Monica Rizk of Phases and Cycles has technical targets of $15 to $16.50, implying 12 to 23 per cent upside potential.

PAST PICKS: APRIL 29, 2019

AECON GROUP (ARE TSX)               

• Then: $18.81
• Now: $14.01
• Return: -26%
• Total Return: -23%

GOEASY (GSY TSX)

• Then: $47.24
• Now: $36.14
• Return: -24%
• Total Return: -21%

KIRKLAND LAKE GOLD (KL TSX)        

• Then: $42.51
• Now: $58.99
• Return: 39%
• Total Return: 40%

Total retunr average: -1%

WEBSITE: www.Selectiveasset.com