Michael Sprung, President, Sprung Investment Management

FOCUS: Canadian Large Caps

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MARKET OUTLOOK:

North American markets have hit recent highs despite a growing list of negative geopolitical and business risks, particularly those stemming from the surprising vote in the UK to "Brexit." At the same time, the global bond markets appear to be signaling an expected decline in economic activity. Governments outside of North America continue to attempt to stimulate economies through quantitative easing and proposed infrastructure spending. Over US$13 Trillion of sovereign debt is now at negative interest rates and the total continues to grow.

Politicians in North America and Europe are exploiting the public's unrest through fear-mongering on the issues of globalization and free trade as was most evident in the Brexit vote and continues in the US presidential race. Whether or not politics can "trump" the economic and demographic cycles remain to be seen.  
 
After a number of years of expansion fueled by debt, we could be entering a period of deleveraging that will stall global economic growth for a period and potentially caused markets to decline and volatility to increase. Investors should be prepared to take advantage in these circumstances to invest in well financed, well managed companies.

Top Picks:

AGT Food and Ingredients (AGT.TO) Last Purchase December 18, 2014, $26.50
AGT is a leader in pulse processing for export and domestic markets. The company has had notable success in diversifying into food ingredients, an area that is facing increasing global demand. 2016 has been declared by the United Nations to be the International Year of the Pulse, highlighting the growing global demand for pulses. Recent stock supply levels may be cutting into current volumes that may result in lower seasonal results. The market appears to have priced this fact in given the recent pullback in the stock price. Export demand is growing and a larger fall harvest is anticipated.

Canadian Imperial Bank of Commerce (CM.TO) Last Purchase December 23, 2015, $92.49
CM is Canada's fifth largest bank by market capitalization. Over the better part of the past decade, management has concentrated on de-risking and shoring up the balance sheet largely by retrenching and focusing on core competencies. The bank is now the most profitable as measured by return on equity and has one of the strongest capital bases. The recent purchase of PrivateBancorp establishes CM with a larger foothold in U.S. This is a well-run, well managed bank and CM has paid a premium to make this purchase. As a result, the stock has languished somewhat against its competitors providing an opportunity for investors. At current prices, the bank yields around 4.9 per cent.

Stuart Olson (SOX.TO) Last purchase April 19,2016, $6.77
Stuart Olson, formerly The Churchill Corporation, is one of Canada's largest construction firms providing general contracting and electrical building systems contracting in the institutional and commercial construction markets as well as electrical, mechanical and specialty services in the industrial construction markets. The stock has underperformed the market and its peers as investors have focused on its exposure to Western Canada. Going forward, there are plans by the governments of Alberta, Saskatchewan and BC, as well as the Federal government, to dramatically increase spending on infrastructure. At the end of the fourth quarter, SOX had a backlog of $1.96B (58 per cent construction, 28 per cent cost-plus, 5 per cent design build and the rest in tenders). The Industrial Services Group while exposed to the oil sands derives its revenue from maintenance, repair and operations in the energy, mining and hydro industries. Stuart Olson has a good balance sheet. The dividend currently yields 7.4 per cent.

Disclosure Personal Family Portfolio/Fund
 AGT.TO Y  N  Y 
CM.TO  Y  N  Y 
SOX.TO  N  N  Y 

Past Picks:  July 29, 2015

Manulife (MFC.TO)

  • Then: $22.98
  • Now: $17.78
  • Return: -22.63%
  • TR: -19.79%

Suncor Energy (SU.TO)

  • Then: $34.62
  • Now: $36.35
  • Return: +5.00%
  • TR: 8.51%

AGT Food and Ingredients (AGT.TO)

  • Then: $30.64
  • Now: $34.15
  • Return: +11.46%
  • TR: +13.51%

Total Return Average: +0.74%

Disclosure Personal Family Portfolio/Fund
MFC.TO Y N Y
SU.TO Y N Y
AGT.TO Y N Y

Twitter: @SprungInvest

Website: www.Sprunginvestment.com

CORRECTION: A previous version of this story incorrectly spelled Stuart Olson's company name. BNN regrets the error.