Ryan Bushell's Top Picks: Sep. 26, 2018

Ryan Bushell, president of Newhaven Asset Management
Focus: Large cap Canadian dividend stocks

MARKET OUTLOOK

Despite a relatively long list of concerns, the TSX remains in positive territory so far this year. We continue to find value in select dividend-paying sectors, including energy infrastructure and select utility holdings, which demonstrate predictable growth in their businesses, long-term contracted cash flows, steadily increasing dividends and attractive yields. Outside of these selected areas, we remain concerned about the ongoing momentum trade in the U.S., concentrated in the FAANG stocks and the cannabis trade closer to home. Following nearly a decade of strong returns, investors have become increasingly concentrated in growth stocks that have exhibited positive momentum both in passive indexed investments and active portfolios as well.

It’s important that investors consistently evaluate and rebalance portfolios in-line with their objectives. At present, we’re focused on preserving capital and maximizing income production ahead of the end of this current cycle whenever that may be. Companies owned in our client portfolios presently produce a sustainable income stream from recession-resistant businesses at reasonable valuations. As the market’s risk appetite continues to grow, ours is shrinking given our clients are conservative investors who desire long-term capital preservation and sustainable returns.

TOP PICKS

ALTAGAS (ALA.TO)
Most recent purchase: $21.60.

I have recommended AltaGas many times since their stock price was derailed by the announcement of the WGL acquisition in early 2017 and have continued to patiently collect a growing dividend and average down personally and on behalf of clients in this stock. It just recently reached levels not seen since the aftermath of the financial crisis. The company has been dogged by negative sentiment surrounding their ability to close the WGL acquisition — it closed in June. They were then dogged by the perception that they can’t fund said acquisition despite selling nearly $1.5 billion in assets at strong valuations. Most recently the shares dropped more than 20 per cent following the announcement that they were pursuing an IPO to complete a partial divestiture of select Canadian utility and power generation assets. Meanwhile, the company has an opportunity to grow the WGL rate base in the high single digits, especially following gas distribution pipeline explosions in the Boston area recently. They are also nearing completion of their Ridley Island Propane Export Terminal, which is likely to be fully contracted at start up early next year and can be doubled with relatively little capital. I met with chairman and CEO David Cornhill recently and believe that given his significant personal investment in the company he will set a course that’s in the best interest of long-term shareholders including myself and my clients. In the meantime, we’re being paid well to be patient.

BROOKFIELD INFRASTRUCTURE PARTNERS (BIP_u.TO)
Most recent purchase: $50.24.

In early May, I doubled my clients’ position in Enercare at about $17 per share, which was then acquired by Brookfield Infrastructure at $29 per share later in the summer. Following the takeover, I had decided to reinvest a portion of the profit from the Enercare position back into the acquirer. Recent weakness in Brookfield Infrastructure’s share price provided an opportunity to buy the shares cheaper than the prescribed share exchange ratio and fit with my desire to add defence to client portfolios with regulated/contracted cash flows, steadily increasing dividends and an attractive yield. Brookfield Infrastructure has more than 95 per cent of their cash flows coming from regulated or long-term contracted assets, which are well diversified across geographies and asset type. The distribution has grown about 11 per cent annually since inception in 2008 and the current yield of 4.9 per cent is attractive in the current market/interest rate environment.

CANADIAN NATURAL RESOURCES (CNQ.TO)
Most recent purchase: $41.50.

Recently, Canadian Natural Resources has retreated to the low end of the trading range the company has been in since late 2016, despite world oil prices that are the highest since the early in the downturn that began in late 2014. CNQ has been caught in the crossfire of widening Canadian heavy oil differentials and negative sentiment following the most recent court decision on the Trans Mountain pipeline. Canadian Natural is poised to see a strong finish to the year following the restart of BP’s Whiting Refinery in Q4, which is the largest consumer of Canadian heavy crude oil. Additionally CNQ is likely to post stronger than expected Q3 results as less than 25 per cent of their production is exposed to heavy oil differentials. Going forward, sanctions on Iran combined with deteriorating political situations in Venezuela and Libya should provide support for the crude complex. At the same time, CNQ’s low decline asset base requires significantly reduced capital expenditures in the coming years, which should drive a growing wedge of free cash flow and dividend increases.

PAST PICKS: OCT. 3, 2017

CENOVUS ENERGY (CVE.TO)
Sold in May for a 15% gain.

I sold this holding in May during the first run in oil prices to over $70 as I was worried about the prospect for Canadian crude oil differentials to blow out when the Whiting refinery owned by BP went down for scheduled maintenance (currently ongoing). It was a tough decision because Cenovus is very levered to higher crude oil prices, but it ultimately proved to be prudent as the shares have dropped about 15 per cent from those levels earlier in the year.

• Then: $12.30
• Now: $12.24
• Return: -1%
• Total return: 1%

SCOTIABANK (BNS.TO)

• Then: $80.40
• Now: $77.63
• Return: -3%
• Total return: -0.4%

ALTAGAS (ALA.TO)

• Then: $28.59     
• Now: $20.55
• Return: -28%
• Total return: -22%

Total return average: -7%

WEBSITE: www.newhavenam.com
LINKEDIN: Ryan Bushell