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

MARKET OUTLOOK

According to the National Bureau of Economic Research, the U.S. economy entered a recession in February. Federal Reserve Chair Jerome Powell recently said that “the levels of output and employment remain far below their pre-pandemic levels and significant uncertainty remains about the timing and strength of the recovery.”

In order to boost the economy, the Fed and U.S. Congress have pledged trillions of dollars of monetary and fiscal support through lending programs and bond purchases. Bond yields have declined and real (after inflation) interest rates have hit new lows.

As a result, gold has hit eight-year highs and has broken above $1,750. Gold appears to be headed to surpass the $1,923.70 high set in September 2011. We see further upside to Barrick Gold and Franco Nevada, which were purchased two months ago.

On a short-term basis, North American equities are over-bought and appear headed for a further 5 to 7 per cent correction. We expect equities to move higher over the coming year.

TOP PICKS

DUNDEE PRECIOUS METALS (DPM TSX)

Dundee Precious Metals has gold/copper mines in Bulgaria and Namibia. It has a 0.3 per cent yield and a modest 3 per cent payout of four-quarter trailing cash flow. On May 6, it reported 80 per cent year-over-year sales growth and an increase of 264 per cent in cash flow. Dundee has a significant 9.2 per cent free cash flow yield. Cash flow is forecast to grow 76 per cent to $1.48 in 2020, with a further 17 per cent increase in cash flow forecast for 2021, giving a 2020 enterprise value to cash flow multiple of 5.9 per cent. Dundee’s forecast return on equity (ROE) for 2020 is an attractive 20.8 per cent (A+).

EMPIRE COMPANY LIMITED (EMP/A TSX)

Empire operates 1,500 grocery stores mainly under the Sobeys, Safeway and IGA banners. It has a 1.5 per cent yield and a modest 7 per cent payout of four-quarter trailing cash flow. On June 18, Empire reported 13  per cent year-over-year sales growth and an increase of 126 per cent in cash flow. It has a significant 12.8 per cent free cash flow yield.  Empire’s free cash flow grew 236 per cent year-over-year to $717 million on a four-quarter trailing basis. Earnings are forecast to grow 7 per cent to $2.29 in fiscal year 2021 with a further 5 per cent increase in earnings forecast for 2022, giving a price-to-earnings multiple of 14.3 times. Empire’s forecast ROE for fiscal year 2021 is an attractive 15.7 per cent (A-). The $38 consensus price target by seven analysts implies 13 per cent potential upside.

NORTHLAND POWER (NPI TSX)

Northland Power generates electricity from wind, solar and natural gas. It has a 3.4 per cent yield and a modest 17 per cent payout of four-quarter trailing cash flow. On May 15, it reported 26 per cent year-over-year sales growth and an increase of 44 per cent in earnings. Northland has a 6.4 per cent free cash flow yield. Its free cash flow was $717 million on a four-quarter trailing basis. Earnings are forecast to grow 6 per cent in 2020 with a further 4 per cent increase in earnings forecast for 2021. Northland’s forecast ROE for 2021 is an attractive 30.6 per cent (A+). The $34.75 consensus price target by eight analysts implies 10 per cent potential upside.

PAST PICKS: AUG. 1, 2019

AECON GROUP (ARE TSX)

• Then: $20.42
• Now: $14.73
• Return: -29%
• Total return: -25%

ANTIBE THERAPEUTICS (ATE TSXV)

• Then: $0.33
• Now: $0.41
• Return: 24%
• Total return: 24%

BADGER DAYLIGHTING (BAD TSX)

• Then: $47.24
• Now: $28.50
• Return: -40%
• Total return: -40%

Total return average: -17%

WEBSITE:  www.selectiveasset.com