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

MARKET OUTLOOK

North American equities are expected to continue to move higher over the next 12 months due to an accommodative Federal Reserve policy and continued growth in the U.S. economy. On an intermediate basis, the broad indexes may pull back, but the underlying trend continues to be very positive.

TOP PICKS

ALIMENTATION COUCHE-TARD (ATD/B TSX)

With a $51.6-billion market cap, Couche-Tard operates a network of convenience and gas stores in North America and Europe. It has a 0.5 per cent yield and a modest 6 per cent payout ratio of trailing four-quarter cash flow. Free cash flow grew 37 per cent to $2.4 billion on a trailing 12-month (TTM) basis. Free cash flow yield is 4.7 per cent (B-) and free cash flow conversion from EBITDA is strong at 0.46 (B+).

On Nov. 26, the company reported a 28 per cent year-over-year increase in cash flow per share. Couche-Tard’s 22 per cent trailing four-quarter return on equity ranks well (A-). Couche-Tard’s trailing price-to-earnings to return on equity of over 93 is attractive (B-).

Tony Popowich, quantitative technical associate at iA Securities, placed a $50 target on Couche-Tard on Jan. 22, implying a potential upside of 9 per cent. Couche-Tard is a candidate for purchase in the Canadian Dividend Strategy, offered by Enriched Investing.

CENTERRA GOLD (CG TSX)

With a $3-billion market cap, Centerra mines and explores for gold in Asia and North America. The company is expected to start paying a dividend by June 2020.

On Nov. 11, Centerra reported a 34 per cent year-over-year increase in cash flow per share. The 2020 price to cash flow multiple of 3.9 times is half that of other gold mining companies in spite of the 37 per cent growth in cash flow forecast for 2020, with 7 per cent further growth forecast for 2021. return on equity is expected to be 14.2 per cent this year and 16.3 per cent in 2021. Centerra’s forecast all-in sustainable cash cost of $650 appears compelling. Upon commencing a dividend, the stock will be a candidate for purchase in the Canadian Dividend Strategy.

PREMIUM BRANDS HOLDINGS (PBH TSX)

With  a $3.7-billion market cap, Premium Brands manufactures and distributes specialty foods in North America. It has a 2.1 per cent yield, a 34 per cent payout ratio of four-quarter trailing cash flow.

On Nov. 11, it reported a 34 per cent year-over-year increase in cash flow per share. Premium Brands’ earnings are forecast to grow 25 per cent in 2020, with 15.4 per cent in further growth forecast for 2021. Return on equity is forecast to be 14.2 per cent this year and 16.3 per cent in 2021.

Premium Brands’ sales to working capital ratio of 13.8 times is excellent (A+). On Feb. 4,  Mark Deriet, quantitative and technical analyst at Cormark Securities  said that next resistance for Premium Brands was at $105-$115, implying 7 to 17 per cent potential upside. Premium Brands is a candidate for purchase in the Canadian Dividend Strategy.

PAST PICKS: FEB. 11, 2019

ALIMENTATION COUCHE-TARD (ATD/B TSX)
2-for-1 stock split occurred on Sep. 30, 2019.

• Then: $73.28
• Now: $45.43
• Return: 24%
• Total return: 25%

BADGER DAYLIGHTING (BAD TSX)     

• Then: $34.97
• Now: $33.94
• Return: -3%
• Total return: -2%

OPEN TEXT (OTEX TSX)                                       

• Then: $48.82
• Now: $62.04
• Return: 27%
• Total return: 29%

Total return average: 17%