Bruce Campbell, chairman, Campbell, Lee & Ross

Focus: Canadian large caps

MARKET OUTLOOK

We would describe ourselves as cautiously optimistic on the market. The TSX is in a challenging position being approximately 60 per cent energy and financials. This means the market desperately needs new pipelines and a relatively healthy Canadian consumer, neither of which seem particularly promising in the short term. In the longer term, however, we see Canadian banks and energy companies trading at trough multiples. Canadian banks are now at approximately 9.9x earnings, which is well below the 10-year average (11.0x) and the lowest we have seen since the global financial crisis.

While we expect earnings volatility to increase in the banks and financials as they adjust their provisions higher, we are sticking to high-quality Canadian lenders while avoiding higher-risk, smaller, secondary-market-focused companies. We have rotated into more globally-diverse equities over the past few years, and have positioned ourselves defensively. Domestically, it seems the Bank of Canada is at a crossroads, with some market commentators now calling for the next move to be a cut. While we aren’t that bearish, we don’t see any further rate increases for the calendar year.

TOP PICKS

ENBRIDGE (ENB.TO)

Volatility creates opportunities. Enbridge has been challenged lately with debt issues, taxation changes and pipeline challenges. We expect that the bad news is now behind them. It received a recent debt upgrade from Moody’s and has a very attractive dividend and growth profile.

BANK OF NOVA SCOTIA (BNS.TO)

The most international of the Canadian banks, now trading at 9.3x earnings, with a four-per-cent dividend yield. They are almost a perfect split of 50 per cent Canadian banking and 50 per cent international/global banking. While we agree there may be some Canadian consumer softness in the near term, much of that is now already being priced into the stocks.

NUTRIEN (NTR.TO)

The combination of Agrium and Potash has created a global powerhouse in the crop-nutrient space, Nutrien is now the third-largest natural-resource company in Canada. It’s trading around 15x next year’s earnings and we expect it to generate 2.5 billion in free cash flow. This offers a lot of room to raise the 3.3 per cent dividend yield (note: only approximately 40-per-cent payout ratio) or lower the already low debt levels.
 

PAST PICKS: MAY 25, 2018

TD BANK (TD.TO)

• Then: $76.46
• Now: $75.82
• Return: -1%
• Total return: 2%

PARAMOUNT RESOURCES (POU.TO)

• Then: $14.91
• Now: $7.55
• Return: -49%
• Total return: -49%

MANULIFE FINANCIAL (MFC.TO)

• Then: $24.93
• Now: $23.58
• Return: -5%
• Total return: -2%

TOTAL RETURN AVERAGE: -16%
 

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