Varun Anand, portfolio manager at Starlight Capital
Focus: Infrastructure stocks

MARKET OUTLOOK

2019 markets have been choppy due to macro factors, but we have seen robust performance primarily driven by multiple expansion as discount rates have declined on lower interest rates and the belief central governments will continue to provide stimulus for markets. Entering 2020, we believe return is going to primarily be driven by earnings growth and yield rather than multiple expansion, which makes stock selection more important than ever in companies that can weather an economic slowdown or benefit from prolonged growth. Enter infrastructure.

We launched in October 2018 and since then we've had dramatic selloffs, strong rebounds, Fed cuts, Fed raises, U.S.-China trade tensions, Brexit and so on. Yet the Starlight Global Infrastructure Fund has performed very well, outperforming  the TSX/S&P 500 by 12 per cent and the MSCI by 13.5 per cent. Year-to-date, the fund has experienced 32 distribution or dividend increases with an average increase of 9.2 per cent. More importantly, the upside/downside capture shows the benefit of having infrastructure in your portfolio. We participate on the upside, but we have a negative downside capture, which means that when markets have gone down, our fund has actually gone up. This is precisely the diversification benefit investors get from owning infrastructure assets.

We want to own companies that will benefit from a growing economic environment, but also withstand an economic slowdown. It’s difficult to predict precisely when a recession will happen, so the best way to manage that is have a diversified portfolio full of high-quality companies that provide essential daily services in regulated industries with high barriers to entry. With our broad definition of infrastructure, we’re able to pivot towards more high-growth subsectors in an economic expansion (rails, midstreams) or more defensive sectors in an economic slowdown (utilities, waste disposal).

TOP PICKS

NORTHLAND POWER (NPI:CT)

Northland is an independent power producer with 2,500 megawatts of operating facilities spanning renewable energy and clean natural gas in Canada and Europe as well as a regulated utility in Colombia. They have 400 megawatts of capacity under construction with more than 1,044 megawatts under development, representing a significant growth pipeline. Northland is an ESG-friendly (environmental, social and corporate governance) candidate for your portfolio: It’s got a large renewable portfolio, it’s a leader in offshore wind development and 30 per cent of its board of directors is represented by women. Northland has an excellent management team with a strong track record and we believe they will continue to execute on their growth initiatives while being conservative on the use of free cash flow.

WASTE CONNECTIONS (WCN:UN)

This waste management company provides non-hazardous solid waste collection services for commercial, industrial and residential customers, serving 6 million in 40 U.S. states and six Canadian provinces. Waste Connection has industry-leading earnings before interest, taxes, depreciation and amortization (EBITDA) margins (30 per cent) and free cash flow margins (12 per cent), with a strong track record of both organic growth and acquisitions. The U.S. waste market is still highly fragmented, and Waste Connections is well positioned to participate in the consolidation of smaller players. The company’s business model is defensive, as waste disposal is an essential daily service anchored by multi-year contracts with industrial customers with inflation-linked pricing, generating a stable cash flow profile.

GIBSON ENERGY (GEI:CT)

Gibson Energy is a North American midstream company with a diverse set of strategically-located infrastructure assets, including terminals (Hardisty, Edmonton), pipelines and tank storage, touching one in every four barrels produced in Western Canada. The company has undergone a remarkable transition over the past two years, divesting non-core assets and focusing on assets with take-or-pay contracts and limited commodity exposure, resulting in a stable cash flow stream with less volatility. We are confident the company will achieve its goal of 10 per cent distributable cash flow growth over the next few years by investing in its own footprint, driven by the addition of two to four tanks per year. The prospect for a diluent recovery unit (DRU) is strong and would be incremental upside to the company's current valuation.

PAST PICKS: JULY 8, 2019

INTERXION (INXN:UN)

• Then: $76.27
• Now: $85.01
• Return: 11%
• Total return: 11%

BORALEX (BLX:CT)

• Then: $19.91
• Now: $21.81
• Return: 10%
• Total return: 10%

COMCAST (CMCSA:UW)

• Then: $42.63
• Now: $45.72
• Return: 7%
• Total return: 8%

Total return average: 10%

WEBSITE: www.starlightcapital.com