Lyle Stein, senior portfolio manager and managing director at Vestcap Investment Management 
FOCUS: Canadian equities
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MARKET OUTLOOK

It has been an interesting 12 months. A year ago, long interest rates had a one per cent first digit, the U.S. dollar was king, and Hillary Clinton was being acclaimed as U.S. president. Today, interest rates have a two per cent handle, the U.S. dollar has tanked and President Trump is the leader of the free world, elected on a policy of lower taxes, reduced red tape, and “Making America Great.” The Trump Bump took markets to new highs, but cracks are appearing, and the narrative is becoming increasingly tenuous. 

At Vestcap, our view is that the complacency which has driven markets lately needs to be replaced with caution. The recent decision by the Fed to unwind its quantitative easing policy is a strong headwind, reversing three decades of ever-lower interest rates. While corporate earnings have been growing, the rate of growth is hardly exceptional, and for any company that misses even muted expectations, the market impact is swift and severe.  While there have been winners, their numbers shrink every quarter, with the valuation levels of the survivors reaching nosebleed levels. In this cautious environment, we continue to favour equities relative to bonds (in client accounts we own virtually no traditional debt instruments and favour preferred shares over corporate debt), and hold higher-than-average cash to put to work when franchise stocks go on sale.    

TOP PICKS

CINEPLEX (CGX.TO)
Stock has been punished as a result of (1) a terrible movie cycle and (2) fears of industry destruction via streaming. We view the decline as transitory and the multiple collapse overdone. Dividend recently raised to $1.68, implying a better-than-bank yield of 4.4 per cent on a near-monopoly Canadian business. Very few “experience” plays in Canada, and this is top of the list. Last purchase at $44.

ENBRIDGE (ENB.TO)
Stock is yielding close to five per cent, better than a bank, and its highest yield in years. Despite political noise, Enbridge is a cash flow machine, with double-digit dividend growth expected over the next few years. Got hurt in the energy collapse and has not recovered as a result of sentiment. 2017 is a soft earnings year, which should see recovery in 2018 and thereafter. Last purchase at $51.

TRICON CAPITAL PARTNERS (TCN.TO)
Mid-cap play on U.S. single family dwellings. Earlier this year, Tricon essentially doubled its portfolio of U.S. single family homes (SFH) with the acquisition of Silver Bay portfolio. Stock has been hit, erroneously in our view, by (1) its view of being a REIT and (2) Canadian dollar strength. Long-term asset story emphasis on tight U.S. SFH sector. Dividend of $0.26 can grow, and yield is 2.5 per cent, better than the cap rate on many Canadian homes. Last purchase at $10.75.
 

PAST PICKS:  NOVEMBER 30, 2016

NORTHLAND POWER (NPI.TO)

• Then: $21.72
• Now: $23.35
• Return: 7.50%
• Total return: 11.22%

GOLDCORP (G.TO)

• Then: $17.73
• Now: $15.92
• Return: -10.20%
• Total return: -9.68%

WELLS FARGO (WFC.N)

• Then: $52.12
• Now: $53.79
• Return: 1.64%
• Total return: 3.79%

TOTAL RETURN AVERAGE: 1.77%
 

TWITTER: @Vestcap1988
WEBSITE: www.vestcap.com