Norman Levine, managing director at Portfolio Management Corporation
Focus: North American large caps
On my last Market Call appearance, one of my top picks was Teva Pharmaceuticals. We subsequently sold our position on February 7 at $32.41. The CEO abruptly resigned and we have assumed there is bad news ahead, so we exited the stock.
North American stock markets have been on a tear since the U.S. election. One thing to keep in mind, though, is that not all stocks and industry groups are participating. Many groups have declined while other groups have soared. Stocks, in general, are advancing for good reason. We see the U.S. economy continuing to strengthen. This is positive for corporate earnings and calls for higher interest rates. While this will be positive for stocks in the long term, we see valuations stretched for many stocks and sectors, and therefore we will not be surprised by a correction. Remember, we are almost eight years into the current bull market, so it is getting a bit long in the tooth. A correction to bring valuations back into line will be welcome. Historically, markets are down on average four per cent in the month following a presidential inauguration, so don’t attribute any weakness just to Donald Trump. It is easy for emotions to get in the way on that subject. One must look through the rhetoric and observe what is actually going on. A stronger U.S. economy means higher yields on bonds and the Fed continuing to raise rates. This will be negative for the bond market until it finds its new equilibrium and negative for stocks and industries that have benefitted from the search for yield, i.e.: REITs, pipelines, utilities, telecom and multinational consumer staples. Positive, though, for financials (especially lifecos and U.S. regional banks), industrials, transportation companies and infrastructure companies. Also, it will continue to give a boost to some rate-reset preferred shares.
ARC RESOURCES (ARX.TO) – Bought November 2014 at $28.55
ARC is an oil and gas exploration and production company in Western Canada. While it operates in all four Western provinces, the majority of its assets are in the Montney play in Northeastern British Columbia. The recent sale of its Saskatchewan oil assets boosts its natural gas production percentage to 72 per cent versus 28 per cent oil. It is a low-cost and high-quality producer with one of the best managements in the business, which is exactly what you want in this type of environment. We are positive on the long-term outlook for natural gas (much more so than oil), so view the company very favourably here. It reported excellent results earlier this week and we would use the current weakness to buy shares. ARC currently yields 2.9 per cent.
CARA OPERATIONS (CARA.TO) – Bought on April 28 2016 at $32.75
Cara is Canada’s oldest and largest full-service restaurant company operating some of the most recognized names in the country. Over 88 per cent are franchised and 66 per cent (including recently acquired St. Hubert) are in Ontario. We like the continued move by Cara to an asset-light business model. When valued versus comparable U.S. restaurant peers, Cara trades at a discount due to weakness in its Alberta restaurants. Improving energy prices should begin to positively affect those comps as the year progresses. It is different, however, as it is a consolidator in the highly-fragmented Canadian market and has a clearer growth path than most of its peer group. It currently has about eight per cent of the highly fragmented full-service restaurant industry and clearly has room to grow that share through both organic growth and acquisition in both full-service and quick-service. The integration of St. Hubert’s manufacturing operation is complete and we look forward to a launch of Swiss Chalet grocery products this spring, to complement the current slate of St. Hubert products. Cara has excellent management (e.g. Sport Check, The Brick) and an opportunity to increase sales, squeeze higher margins from recently-acquired businesses and increase franchise fees on many of its legacy restaurants. Cara currently sports a dividend yield of 1.6 per cent.
KONE OYJ (KNYJY.PK)
We have owned this for a number of years and are still buying it for new clients at current prices. Kone is the world’s second or third largest elevator and escalator company (essentially tied with Schindler at 18 per cent market share). Its operations are divided between new installations and service. New installations are dependent on economic growth. Recovering economies in the U.S. and Europe are providing current growth. Most recently, the company has experienced weakness in the Chinese elevator market (China represents 30 per cent of sales) and this has caused the stock to decline, providing an excellent window to purchase the shares. The service business (about 60 per cent of revenues) is very high margin and defensive and is currently driven by established markets. The company is in a net cash position and increases its dividend on a regular basis. Kone currently yields 3.9 per cent.
PAST PICKS: FEBRUARY 3, 2016
MORNEAU SHEPELL (MSI.TO)
- Then: $14.75
- Now: $18.99
- Return: 28.75%
- TR: 34.48%
- Then: $45.45
- Now: $58.69
- Return: 29.13%
- TR: 32.08%
SUN LIFE FINANCIAL (SLF.TO)
- Then: $38.44
- Now: $51.74
- Return: 34.60%
- TR: 39.57%
TOTAL RETURN AVERAGE: +35.38%