Teal Linde, manager at Linde Equity Fund

Focus: North American mid and large caps


MARKET OUTLOOK 

Canadian markets are looking more attractive.

Through most of the current bull market, which began just over 10 years ago, U.S. stock markets have noticeably outperformed the Canadian stock market. This contrast in results is a major reason that Canadian stocks are beginning to look more intriguing compared to some of their U.S. counterparts.

Since December 31, 2010, the total return (including dividends) of the S&P 500 was 178.8 per cent at of the end of April 2019, while Canada’s S&P/TSX Composite lagged the U.S. market considerably with a return of just 57.7 per cent.

As market prices have changed, market valuations (price-to-earnings ratios) have also shifted dramatically. From 2011 to 2015, the Canadian market was consistently trading at valuations above those of the U.S. market, but since then it has been trading at consistently and markedly cheaper valuations.

In the early 2000s, Canada became a popular country to invest in due to its high concentration of resource-based stocks at a time when commodity prices for those resources were rising. In fact, between 2004 and 2010 the Canadian market outperformed the U.S. market in every single year as global investors bid up Canadian stock valuations. However, in more recent years, a combination of increased investment in resource extraction opportunities and a more subdued commodity demand due to slower economic growth has caused commodity prices to suffer along with the stock prices of companies that are dependent on resource prices.

This has actually changed the dynamic of the Canadian market. Earlier in the decade we restrained ourselves from being too heavily weighted to the Canadian market due to its high concentration in the energy and materials sectors, which rely heavily on strong commodity prices to be successful. However, the subsequent weakness in these sectors has actually caused the composition of the Canadian market to change considerably. Back in December 2010, approximately half of the total value of the S&P/TSX Composite consisted of energy (27 per cent of the composite’s market cap) and materials (24 per cent of the composite’s market cap) names. Today these sectors account for barely one-quarter of market capitalization (18 per cent for energy and 10 per cent for energy).

After several years of weak performance, hurt by weakness in commodity prices, Canada is off the radar of many investors. When a market is not popular, its valuations often decline its investment appeal and actually increases. With the Canadian market now much less dependent on resource-based performance and trading at discounts to the U.S. market, Canada’s share of attractive investment opportunities have been rising. While U.S. stocks usually draw more attention than Canadian stocks, our Canadian positions appear more set to contribute additional portfolio gains for the balance of the year.

TOP PICKS

LINAMAR (LNR.TO)

Last purchased on April 15, 2019 at $51.23.

Linamar is ranked 33rd among the Top 100 Automotive Suppliers in North America and 65th among the Top 100 Automotive Suppliers globally in terms of automotive parts sales. With current operations in North America, Europe and Asia as well as further expansion plans underway in China, Brazil and India, Linamar is well-positioned to support the continuing original equipment manufacturer trend of global automotive platforms. Linamar has strong historical sales growth, a stable balance sheet and a willingness to invest in new capital and technologies.  Linamar is currently trading at a historically cheap 5.1 times 2019 expected earnings per share (EPS) of $8.99.  Recognizing value, CEO Linda Hasenfratz purchased 50,000 shares on the open market in December at $45.36 for a total value of $2,268,000.  The price is still at this level today.

TRICAN WELL SERVICES (TCW.TO)

Last purchased on February 7, 2019 at $1.30.

From a valuation perspective, Trican’s net tangible asset value is over $600 million or approximately $2.00 per share. Recognizing its equipment would likely fetch less than tangible book value if auctioned off in today’s weak market, we will apply a 25 per cent discount to the net tangible book value to arrive at the company’s estimated liquidation value, which would be approximately $1.50 per share.  Therefore, at its recent share price of $1.34, Trican is trading below its liquidation value.  With a minimal debt-to-service ratio, Trican has the ability to endure through this downturn until the cycle eventually improves.  Therefore, for the patient investor, Trican offers a “Heads you win, tails you lose a little,” proposition. A return to tangible book value of $2.00 offers around 50 per cent upside. Also, a return to $5.00 reached in 2017 offers over 250 per cent upside with downside appearing more limited.

SQUARE (SQ.N)

Last purchased on April 15, 2019 at $74.39.

Square is a leading payments and point-of-sale (POS) provider launched in 2009 by Twitter CEO and co-founder Jack Dorsey.  Dorsey was inspired when his friend Jim McKelvey was unable to complete a $2,000 sale of his glass faucets and fittings because he could not accept a prospective buyer’s credit card. Recognizing that the best new business ideas solve problems, Dorsey and McKelvey decided to create a device and app to enable receiving credit card payments by anyone with a smartphone. From starting with accepting credit card payments on a smartphone, they went on to build an entire suite of tools to help small businesses succeed.  The company’s success has led to over a billion dollars in annual revenue and more than two million active merchants in just its first five years.  The company continues to grow rapidly with EPS expected to grow 60 per cent in 2019,  around 50 per cent next year and nearly 50 per cent the following year.

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
LNR Y Y Y
TCW Y Y Y
SQ Y Y Y


PAST PICKS: May 28, 2018

FACEBOOK (FB.O)

  • Then: $184.92   
  • Now: $184.78    
  • Return: -0.1%    
  • Total return: -0.1%

ALIBABA (BABA.N)

  • Then: $199.20   
  • Now: $163.95    
  • Return: -18%     
  • Total return: -18%

INTACT FINANCIAL (IFC.TO)

  • Then: $96.99     
  • Now: $116.28    
  • Return: 20%    
  • Total return: 23%

Total return average: 2%

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
FB Y Y Y
BABA Y Y Y
IFC Y Y Y

WEBSITE:  www.lindeequity.com