Jan 5, 2021

Robert McWhirter's Top Picks: Jan. 5, 2021

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Robert McWhirter's Top Picks

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

MARKET OUTLOOK

The International Monetary Fund forecasts that world GDP growth will rise by 5.2 per cent in 2021, with a lot of the recovery coming in the second half of the year.

Governments and companies have moved from holding lean “just in time” inventories to “just in case” inventories. As a result, corn, wheat and soybeans are trading at or near six-year highs.

Reflecting an improved economic outlook for the global economy and rising inflation concerns (including food) U.S. 10-year bond yields (0.93 per cent) have risen from their 0.52 per cent low on Aug. 2 and are expected to continue moving higher toward 1.4 per cent.

Citi Private Bank strategists recently noted that about four fifths of the world’s investment grade debt yields 1 per cent or less. They said that “investing in productive assets will be necessary to earn real returns. That is especially good for equities.”

All of this positive news is in contrast to COVID-19, which continues to capture the headlines. New variants of the virus have increased the need for vaccination by one third from 65 to 85 per cent.

In spite of this uncertainty, equity markets should continue to rise over the next 12 months as equities appear to be an attractive alternative to low bond yields.

TOP PICKS

Robert McWhirter's Top Picks

Robert McWhirter, president of Selective Asset Management discusses his top picks: Dollarama, Dundee Precious Metals and Lundin Mining.

Dollarama (DOL TSX)

Dollarama operates discount retail stores providing low priced everyday consumer products, general merchandise and seasonal items. It has a 0.3 per cent yield, a low 7 per cent payout of four-quarter trailing cash flow and a 3.8 per cent free cash flow yield. Dollarama’s free cash flow grew to $610 million on a four-quarter trailing basis.

It reported results on Dec. 9. Sales per share were up 14 per cent and earnings were up 23 per cent, 15 per cent above analysts’ expectations. Earnings are forecast to grow 15 per cent to $2.02 in 2021 with further earnings grow of 17 per cent forecast for 2022. Analysts’ earnings estimates for 2021 were revised up by 3 per cent in the past 90 days. Dollarama’s trailing return on invested capital is 11.1 per cent (B-). The consensus price target from nine analysts of $61 implies 18 per cent potential upside.

Dundee Precious Metals (DPM TSX)

An international gold mining company with two mines in Bulgaria and one in Namibia, Dundee has a 0.8 per cent yield and a low 5 per cent payout of four-quarter trailing cash flow. Dundee’s free cash flow yield is attractive at 13.7 per cent. FCF grew 209 per cent year over year to $244 million on a four-quarter trailing basis. In Q3, sales per share grew 63 per cent while cash flow per share grew 120 per cent.

Dundee’s cash flow is forecast to grow 26 per cent to $2.25 in 2021, giving a price to cash flow multiple of 4.4 times. This is a 45 per cent discount to the p/cf multiple of the average TSX materials stock. Analysts’ cash flow estimates for 2021 were revised up by 4.4 per cent in the past 90 days. Dundee’s forecast return on equity for 2021 is 26 per cent (A-). On Dec. 29, Tina Normann, technical analyst with Eight Capital, said “golds are definitely on our January momentum ‘buy’ list. Over the course of the last month, both the commodity and stocks have been carving out bullish reversal patterns against an improving momentum trend.”

The $13.25 consensus price target by seven analysts implies 37 per cent potential upside.

Lundin Mining (LUN TSX)

Lundin is a diversified metals mining company. Copper makes up about two thirds of sales. Goldman Sachs analysts recently noted that the strength in the price of copper ($3.52/pound) is the first leg of a structural bull market in copper. By the first half of 2022, Goldman says it’s “highly probable” copper could surpass its February 2011 high of $5.07 per pound, implying 44 per cent potential upside. Lundin has a 1.3 per cent yield and a low 12 per cent payout of four-quarter trailing cash flow.

The dividend is expected to rise by 50 per cent when Lundin reports Q4 results. Lundin’s free cash flow grew 134 per cent year over year to $165 million on a four-quarter trailing basis. In Q3, sales per share grew 13 per cent while cash flow per share grew 71 per cent. Lundin’s cash flow is forecast to grow 68 per cent to $1.72 in 2021, giving a 2021 price/cash flow multiple of 6.6 times. Analysts’ cash flow estimates for 2021 were revised up by 12 per cent in the past 90 days. Lundin’s forecast return on equity for 2021 is 11.1 per cent (B-). On Dec. 30, Tony Popowich, quantitative technical analyst at iA Securities. noted that Lundin “has clearly resolved the decade-long trading range to the upside through the $10 zone. The breakout counts further technical upside in excess of $18,” implying 51 per cent potential upside.