Robert McWhirter, president of Selective Asset Management Inc.
FOCUS: Canadian equities and technology stocks
Rising world economic growth combined with the declining U.S. dollar has boosted commodity prices. Oil appears to have broken out above US$60 and copper appears to have broken out to the upside as well. U.S. 10 year bond yields (2.48% Jan.5/2018) appear to be headed higher, and are expected to surpass the previous 2.62% level set in mid-December 2016 and mid-March 2017.Rising interest rates would be positive for Canadian bank stocks.
Sid Mokhtari, CIBC World Market’s technical analyst, noted on Jan 3, 2018 that “the TSX index has broken out of a 10-year sideways consolidation pattern with momentum confirmation, with 5%-7% upside." Our Canadian Dividend strategy looks for companies with above average growth at below average valuations. The 25 Canadian stocks held in the portfolio have two times the S&P/TSX’s trailing sales and eps growth at 50% lower valuation (p/e to growth). With low debt and an average 18.7% ROE, 50% better than the S&P/TSX, we expect the portfolio which gained 15.1% in 2017 to continue to outperform.
CANADIAN TIRE (CTC’A.TO)
$11.2 billion market cap
Operates a nationwide store network selling home goods, sports equipment, apparel, footwear, automotive parts and accessories. 2.2% yield, 21% payout ratio of 4 quarter trailing cash flow. Reported November 9th/2017: YOY sales per share were up 12%, and YOY EBITDA per share grew 7.3%.
Free cash flow yield improved to 1.1% (C+) from -0.5% a year ago. ROE ttm of 14.4% is forecast to rise to 16.7% for the 2018 calendar year. P/Book to ROE is 0.17X (available at CapitalCube.com).
The shares appear attractive with a 1.5x enterprise value to trailing sales versus 12% YOY sales growth = EV/Sales to Sales growth ratio of 0.12 (C+). To report earnings on Feb.15th / 2018: Forecast: $3.82versus $3.36, a 14% increase.
The forecast P/E multiple of 13.8X divided by the 23% forecast eps growth is a p/e to growth (peg) ratio of 0.57X (C+) also appears attractive. On January 5th,2018 technical analyst Tony Popowich at Velocity Trade Capital noted that “the stock is lifting out of a 1+ year consolidation within the confines of a bullish parallel channel at the $165.00 zone. The top of the channel is currently rising through $185.00+”. implying potential upside of 12%. CTC.A is held in the Canadian Dividend Fund.
MARTINREA INTERNATIONAL (MRE.TO)
$1.4 billion mkt cap
Designs and manufactures metal parts and assemblies and fluid management systems mainly for the automotive sector. Despite the 30% rise since November 15th when MRE was one of our top picks at $12.10. We continue to believe MRE is attractive. On March 1st Martinrea is expected to report a 31% increase in year over year eps growth ($.47 vs$.36). Martinrea trades at a modest 5.4X enterprise value to four quarter trailing EBITDA EV/EBITDA). EBITDA per share grew 15% year over year which gives an attractive EV/EBITDA to EBITDA growth ratio of 0.36x. With a 20.2% forecast return on equity and a P/BOOK to ROE of 0.9X (available at CapitalCube.com) MRE’s shares appear attractive.
On December 27th,2017 technical analyst Tony Popowich at Velocity Trade Capital noted that Martinrea has “broken out of a multi-year base at $15.00 (with) further technical upside in excess of $25.00” implying 62% potential upside. MRE is held in the Cdn Dividend Fund.
OPEN TEXT (OTEX.TO)
$11.4 billion market cap
Provides enterprise information management software to archive, aggregate, retrieve and search unstructured information. 1.5% yield, 20% payout ratio of 4 quarter trailing cash flow. Reported November 2nd/2017: yoy sales per share were up 20%, and yoy earnings per share grew 21%. Free cash flow of $501 million on a 4 quarter trailing basis is a free flow yield of 4.4% (B-)
ROE ttm of 16.0% is forecast to rise to 18.6% for the June 30/2018 fiscal year. P/Book to ROE is 0.15X (available at CapitalCube.com) 12.6x enterprise value to trailing EBITDA versus 29% yoy EBITDA growth =EV/EBITDA to EBITDA growth of 0.58 (C-). To report earnings on Feb.1st/ 2018: Forecast: $.78 versus $.72 ,an 8% increase. The forecast P/E multiple of 13.8X divided by the 23% forecast eps growth is a p/e to growth (peg) ratio of 0.57X (C+). Shares of Open Text are held in the Canadian Dividend Fund.
PAST PICKS: FEBRUARY 20, 2017
- Then: $43.70
- Now: $45.04
- Return: 4.25%
- Total return: 7.08%
NEW FLYER INDUSTRIES (NFI.TO)
- Then: $44.01
- Now: $55.28
- Return: 25.60%
- Total return: 28.53%
WESTERN FOREST PRODUCTS (WEF.TO)
- Then: $2.12
- Now: $2.53
- Return: 19.33%
- Total return: 23.47%
TOTAL RETURN AVERAGE: 19.69%
Canadian Dividend Fund
1 Month: -0.3% fund, 0.6% index
1 Year: 15.10% fund, 8.32% index
3 Year: 11.74% fund, 5.79% index
*Index: TSX Total Return Index
One year: Value add on $100,000 investment versus TXTR = $6,780
3 Year: Value add on $100,000 investment versus TSXTR = $21,096.
3 year to Nov.30/2017: CDZ iShares:Cdn Div Aristocrats ETF: 4.02%; AUM: $1.1 billion
3 year to Nov.30/2017: XDV iShares Cdn Selective Dividend ETF: 5.09%; AUM: $1.4 billion
The Cdn Dividend Fund outperformed the above CDZ and XDV by 2X on a 3 year basis! The 3 year Value Add on a $100,000 investment versus CDZ to Dec.31/.2017 was $33.206.
TOP HOLDINGS AND WEIGHTINGS
- Martinrea: 5.4%
- Dollarama: 5.1%
- West Fraser Timber: 4.7%
- Waste Connections: 4.7%
- Magna International: 4.2%