Robert McWhirter, president of Selective Asset Management Inc.

Focus: Canadian dividend and small cap stocks

MARKET OUTLOOK

On Oct. 11, 2018 BNN Bloomberg market commentary we noted: rising interest rates (the U.S. 10-Year Bond Yield was at a seven year high of 3.23 per cent), rising oil prices (US$76.90), rising wages and the International Monetary Fund’s recent forecast for reduced global economic growth, have all increased investor caution causing an intermediate correction in equity markets. We expected that the intermediate correction would be finished by the end of the year.

From October 11 to the close on December 27 the S&P/TSX index declined 7.5 per cent, the S&P 500 was down 8.8 per cent, the U.S. 10-Year Bond Yield declined 15 per cent and WTI oil declined 42 per cent to US$44.61.

At the end of November, our Canadian Dividend Strategy offered by Enriched Investing held 50 per cent cash. Our current buy list is sparse waiting for sustained equity price improvement.

On December 18 technical analyst Leon Tuey wrote that “Extreme Pessimism Presents a LOW Risk (Equity) Buying Opportunity”. Leon noted that while U.S. equity indices have declined significantly, the advance decline lines have not declined as much reflecting less erosion in the broader market. From Dec. 18, 2018 the S&P 500 declined a further 7.8 per cent to the 2,346.70 intraday low set on December 27. The U.S. 10-Year Bond Yields, now at a nine month low of 2.74 per cent, are also technically oversold and like equity markets they are expected to move higher.

TOP PICKS

KIRKLAND LAKE GOLD (KL.TO)

Kirkland Lake Gold has a $7.4 billion market cap and is a Canadian based gold company with mines in Canada and Australia.

It has a 0.5 per cent yield, a modest four per cent payout ratio of four quarter trailing cash flow. The company reported on Oct. 30, 2018 that year-over-year sales per share grew 29 per cent, while earnings per share grew 97 per cent. Kirkland Lake has a 6.0 per cent trailing 12 months (TTM) free cash flow yield ($412 million TTM).

Earnings per share are forecasted to grow 56 per cent in calendar 2018, 13 per cent in 2019 resulting in a 23 per cent return on equity (ROE) and price-earnings (P/E) multiple of 19.8 times with 28 per cent further earnings per share growth forecast for 2020.

Kirkland Lake is expected to report earnings on Feb. 20, 2019 with a forecast of $0.53 versus $0.44, a 22 per cent increase.

Gold production is forecasted to be 620,000 ounces in 2018, rising 24 per cent in 2019 to 770,000 ounces (the mid-point of management’s guidance) with attractive All-In Sustainable Costs (ASIC) of $630 to $680 an ounce.

While Kirkland Lake’s earnings estimates have increased nine per cent in the past 60 days based on this guidance analysts’ estimates of 2019 earnings per share (EPS) growth of 13 per cent are expected to be revised upwards again. Positive estimate revision has historically been a strong factor in rising stock price.

ROGERS COMMUNICATIONS  (RCIb.TO)

Rogers Communications has a $36.0 billion market cap and is Canada’s largest wireless service provider (60 per cent of sales) with 10 million subscribers. The cable segment is 25 per cent of sales and the media group is 15 per cent of sales.

Rogers has a 2.8 per cent yield, a modest 22 per cent payout ratio of four quarter trailing cash flow. The company reported on Oct. 19, 2018 with year-over-year sales per share growing four per cent, while earnings per share grew 12 per cent. Rogers has a 1.9 per cent TTM free cash flow yield ($690 million).

Earnings per share are forecast to grow 18 per cent in calendar 2018, seven per cent in 2019 giving a 31 per cent ROE and P/E multiple of 15 times in 2019, with seven per cent further earnings per share growth forecast for 2020.

Rogers is expected to report earnings on Jan. 24, 2019 with a forecast of $1.08 versus $0.88, a 22 per cent increase.

QUEBECOR (QBRb.TO)

Quebecor has a $7.3 billion market cap and is Canada’s fifth largest wireless service provider. The Videotron cable unit provides service to 2.8 million homes in Quebec.

Quebecor has a 2.8 per cent yield, a modest three per cent payout ratio of four quarter trailing cash flow. The company reported on Nov. 8, 2018 with year-over-year sales per share growing three per cent, while earnings per share grew 24 per cent.

Quebecor has a high 13.4 per cent ROC and a high 9.8 per cent free cash flow yield ($714 million TTM). Earnings per share are forecasted to grow 29 per cent in 2018 and three per cent in 2019, with 11 per cent further earnings per share growth forecasted for 2020.

The company is expected to report earnings on March 13, 2019 with a forecast of $0.44 versus $0.33, a 32 per cent increase.

PAST PICKS: JAN. 5, 2018

CANADIAN TIRE (CTC/A TSX)

• Then: $167.45   
• Now: $141.62    
• Return: -15%     
• Total return: -14%

MARTINREA INTERNATIONAL  (MRE.TO)

• Then: $15.95     
• Now: $10.73      
• Return: -33%
• Total return: -32%

OPEN TEXT  (OTEX.TO)

• Then: $42.57     
• Now: $44.31      
• Return: 4%         
• Total return: 6%

Total return average: -13%

FUND PROFILE

Canadian Dividend Strategy

Performance as of Nov. 30, 2018

• 1 month: 0.59% fund, 1.4% index
• 8 month: -8.6% fund, 0.72% index
• 3 year: n/a fund, n/a index

 Index: S&P/TSX Total Return Index

Returns based on reinvested dividends and net of fees.

TOP HOLDINGS AND WEIGHTINGS

1. Waste Connections: 5.9%
2. Quebecor: 5.7%
3. Aecon Group: 4.8%
4. Rogers Communications: 4.8%
5. Ritchie Bros Auctioneers: 4.3%      

WEBSITE: selectiveasset.com