Teal Linde, manager at Linde Equity Fund
FOCUS: North American mid and large caps

MARKET OUTLOOK

What would rising interest rates mean for the stock market?

While we believe stocks can generate strong gains in the long term, we also believe investment managers would be prudent to consider factors that may derail upward trajectory in the shorter term. One risk to continued gains in the short-term is the potential for rising interest rates.

Most investors have never experienced anything but declining interest rates over their investing lifetimes and it is difficult to conceive of anything different. But after 39 years of declining rates to levels near zero, perhaps it would be wise to consider the possibility rates could rise.

Could U.S. federal debt levels, which as a percentage of national economic output now exceed those from World War II, be a catalyst for a gradual, long-term move higher in interest rates?

Extremely low interest rates have been very supportive for stocks in recent years. Real bond yields (interest rate minus inflation) are currently negative. This has resulted in money flowing into stocks and substantially raised the price-to-earning multiples investors are willing to pay for stocks. But if real yields were to begin to rise (they have already risen about 0.30 percentage points off their August 2020 lows) it would likely mean a compression in price-to-earnings multiples in the stock market. Improvements in earnings could be offset by lower multiples, which could send the market sideways for the next few years.

This possibility is one of many reasons for the importance of stock selection in coming years. One sector likely to benefit from higher interest rates would be financials as interest rate increases would improve their prospects. Investors should also own companies growing fast enough to outrun the negative effect of rising interest rates.

TOP PICKS

EQUINOX GOLD (EQX TSX)
Last purchased on July 14, 2020 at $15.

Led by chair Ross Beaty, Equinox Gold is a multi-asset mining company and one of the only large gold producers operating solely in the Americas. The company has seven mines in the U.S., Mexico and Brazil and is advancing three growth projects expected to significantly increase production. Equinox is pursuing a plan to grow annual production to one million ounces of gold within three years, up from half a million ounces in 2020.

PREMIUM BRANDS HOLDINGS (PBH TSX)
Last purchased on October 20, 2020 at $98.94.

Premium Brands is among Canada’s largest food companies and one of North America’s largest sandwich companies. It’s an investment platform focused on acquiring and building specialty food businesses in partnership with talented entrepreneurial management teams. The objective is to turn these well-run, good companies into great ones by providing additional capital and marketing expertise. The company owns over 50 brands including Freybe, Duso’s, Oberto, Grimm’s, Bread Garden Go and many other specialty food companies. They are privy to industry tailwinds like ingredient transparency, on-the-go consumption, local sourcing and products without antibiotics and artificial additives.

ENSIGN ENERGY SERVICES (ESI TSX)
Last purchased on Nov. 12, 2020 at $0.55.

Calgary-based Ensign is a leading oil driller. For 2020, 80 per cent of its revenues are expected to come from U.S. and International market with less exposure to the struggling Canadian oil and gas industry. The company’s shareholder equity is $1.4 billion and its market cap is $85 million, meaning it trades at 6.5 per cent of its book value not including intangible assets. The stock was trading at $2.50 in January, before the oil price crashed. Insiders were actively buying below 50 cents including CEO and CFO Murray Edwards, who owns 20 per cent of Ensign. Ensign has a large $1.5 billion debt load and is expected to breach covenants, but the company has been generating positive cash flow through 2020 and is expected to manage through the challenging market with lender support.

PAST PICKS: NOV. 11, 2019

AIR LEASE (AL NYSE)

Airlines are financially stressed and reliant on government assistance. After the pandemic, they will be focused on paying down their debts. Buying new planes will be difficult and airlines will be increasingly inclined to lease, benefitting Air Lease.

• Then: $45.81  
• Now: $37.11
• Return: -19%
• Total return: -17%

FACEBOOK (FB NASD)

The biggest surprise for Facebook is the greater-than-expected revenue growth recovery in 2020. When the pandemic first struck, 2020 revenue growth estimates were reduced to nearly zero which proved too pessimistic. 2020 estimates have bounced back to 19 per cent year-over-year, nearly returning to pre-pandemic levels.

• Then: $189.61
• Now: $274.85
• Return: 45%
• Total return: 45%

ROGERS COMMUNICATIONS (RCI/B TSX)

• Then: $63.10
• Now: $60.49
• Return: -4%
• Total return: -1%

Total return average: 9%