\Market Call for Monday, May 15, 2017
Bruce Campbell, president and portfolio manager at Campbell, Lee & Ross
Focus: Canadian large caps
Although a lot has been written about an imminent market correction, especially after a strong performance post the U.S. election in November, it has thus far not materialized. The Dow peaked at 21,169 in the first week of March and has weakened by approximately 270 points since. The most popular question, apart from tax-related ones, is when a correction will occur. This is a legitimate question, especially as corrections are commonplace and the North American equity markets have had a good run. The reality is that corrections usually occur when the U.S. Federal Reserve stops raising rates and the yield curve inverts — so not yet. The big wildcard is Trump, so this too is worth exploring further.
After a fast start issuing executive orders, Trump’s agenda has come to a screeching halt. We have identified three initiatives that are positive for growth and equities: lower tax rates, less regulation and a $1-trillion infrastructure spend. His first order of business was to repeal and replace Obamacare or the Affordable Care Act. He was unable to do this (it never even made it to a vote) despite the Senate, the House and the presidency all being in Republican hands. The positive: it “should” be a wake-up call that governing is hard and he needs the cooperation of all three levels of government to get things done. The negative: anticipated cost savings from his health-care reform would offset the lower revenues from lower taxes and also help fund the infrastructure spend. There is a risk that these initiatives will take longer to materialize and be smaller in magnitude, but the Republicans must get something done or risk a drubbing in the 2018 mid-term elections.
We expect a bumpy sideways ride for a while, but companies that show earnings growth should do well, and earnings misses are getting crushed. Stock selection will be important.
SNC-Lavalin is the largest Canadian engineering and construction company with ownership of the 407 ETR (toll road in Toronto, 16.7 per cent interest). The recent acquisition of Atkins makes the company’s EPS trajectory more compelling than its global peers with the shares trading at less than six times 2018E EV/EBITDA, which is a discount. Synergies are large going forward and the backlog is still around $10 billion, so we like the combination of growth at a low valuation.
BANK OF NOVA SCOTIA (BNS.TO)
The Bank of Nova Scotia is roughly 50 per cent Canadian and 50 per cent international. The stock has pulled back 10 per cent from its recent highs, which represents an attractive entry point as the P/E multiple is now back to slightly below historical averages. They do not do alternative lending a la Home Capital, so we think this dislocation has caused the stock to fall and presents an opportunity.
Enbridge has a good combination of earnings growth and expected dividend growth of eight to 10 per cent over the next five years, which meshes nicely with a four per cent+ dividend yield. Long-life assets and the funding have been done already, so relatively low-risk growth coming.
PAST PICKS: MARCH 15, 2016
Still hold and like for the U.S. expansion and growth
- Then: $15.55
- Now: $18.61
- Return: 19.67%
- TR: 26.91%
ISHARSE MSCI EUROPE IMI INDEX ETF (CAD-HEDGED) (XEH.TO)
Sold and changed our exposure to several individual names as my new colleague, Darren Sissions, came into the firm.
- Then: $20.20
- Now: $24.72
- Return: 22.37%
- TR: 25.68%
ELEMENT FLEET MANAGEMENT CORP (EFN.TO)
Held through the split: the next few quarters should be improved and show the new companies’ strengths.
- Then: $11.90
- Now: $11.34
- Return: -4.70%
- TR: -3.29%
ECN CAPITAL (ECN.TO)
- Then: $3.29
- Now: $3.76
- Return: 14.89%
- TR: 15.58%
TOTAL RETURN FOR EFN and ECN: 12.29%
Element Financial split into two companies in September 2016. Element Fleet and ECN Capital have been combined. This is included in the average return of all three past picks.
TOTAL RETURN AVERAGE: 21.62%