Ryan Bushell, president and portfolio manager, Newhaven Asset Management

FOCUS: Canadian dividend stocks

MARKET OUTLOOK:

At the beginning of this year, I felt a strange divergence of confidence between our infrastructure-based, energy-focused portfolio and the level of broader equity markets. So far in 2022, the feeling has been correct with our portfolios up nearly 10 per cent year-to-date while the S&P 500 is down more than 6 per cent and the Nasdaq down 12 per cent. 

Clearly, the conflict in Ukraine has shifted the paradigm for commodities, however the fundamental reason for the changes in investor positioning likely has more to do with interest rate expectations, and that process began last fall before accelerating in 2022. 

Unfortunately, the conflict in Ukraine is poised to continue and exert tremendous pressure on inflation expectations leading to an even faster pace of interest rate increases than previously anticipated. An already-stretched consumer is likely to have difficulty powering the economy forward in the coming quarters and thus I am very cautious on both economic growth and stock market valuations for the foreseeable future. 

In my view, investors would be wise to evaluate their portfolios and focus on essential needs like food, energy, and shelter at the expense of discretionary consumption and richly-valued ideas with limited profitability in the technology sector. The recent bounce in the S&P 500 and Nasdaq is likely to fade without a significant de-escalation of geopolitical conflict and/or a big drop in energy/food prices.

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TOP PICKS:

CAE Inc (CAE TSX)

Most Recent Purchase $31 – All things aviation are firing on all cylinders it seems, however CAE remains 25 per cent off its 52-week high. I expect their civil training business to steadily grind towards higher utilization levels while the defence business garners renewed emphasis given the events in Ukraine and elsewhere. When combined with the structural setup for the industry (pilot turnover, new planes, growth of chartered private aviation), I think the setup looks positive for CAE for the foreseeable future.  I am also hopeful they will revisit the dividend in the next couple of years.

Enbridge (ENB TSX)

Most Recent Purchase $56 – Enbridge remains too cheap given the fundamentals of their business with a dividend yield that exceeds 6 per cent. I am very cautious on markets over the next few months and am looking for places to invest capital earning a solid income return without much risk to the capital. I can’t think of a more solid option to satisfy this goal given present circumstances than Enbridge 

K-Bro Linen (KBL TSX)

Most Recent Purchase $31 – I recommended K-Bro in Q4 2021 at higher prices and the shares have dropped another ~20 per cent since that time. This business is solid and poised to recover in 2022 and beyond as demand from hospitality businesses returns. The company has inflation escalators in nearly all of their contracts and is in a good position to generate increasing amounts of free cash that can fund acquisitions and/or dividend growth. The recent drop on Q4 earnings was largely omicron driven and not likely to repeat. The shares yield nearly 4 per cent at current levels and are not expensive in a market that may be vulnerable to interest rate risk and exogenous shocks.

PAST PICKS: March 23, 2021

Telus (T TSX)

• Then: $26.35
• Now: $32.09
• Return: 22%
• Total Return: 27%

Arc Resources (ARX TSX)

• Then: $7.36
• Now: $16.69
• Return: 127%
• Total Return: 131%

Brookfield Renewable Partners (BEP-U TSX)

• Then: $51.44
• Now: $51.48
• Return: 0.7%
• Total Return: 3%

Total Return Average: 54%