Robert McWhirter, president at Selective Asset Management
Focus: Canadian dividend and growth stocks
In 2016, the seven- to 10-year maturity U.S. bond ETF “IEF” declined 0.7 per cent, and the 20-year maturity U.S. bond ETF “TLT” declined 1.2 per cent. While the year-over-year price changes were modest, these bond ETFs declined by 7.3 per cent and 15.8 per cent, respectively, from their price highs set in July 2016. We believe that the 35-year decline in interest rates that began in 1981 has ended. This appears to be confirmed as the S&P 500 ETF “SPY” has broken out of a three-year base versus the U.S. 20-year bond ETF “TLT.” We expect bond prices to recover in the next two months, providing investors with an opportunity to reduce bond holdings to underweight and move to an overweight in equities. Investors are encouraged by the U.S. president-elect’s desire to cut U.S. corporate taxes. It is estimated that the potential decline in U.S. corporate tax revenue could be $2.4 trillion, exclusive of any increase in tax revenue from economic growth.
The U.S. Joint Committee on Taxation will use a dynamic scoring system to measure the impact of the tax changes on GDP growth and job growth. Meanwhile, it is encouraging that Canadian and U.S. corporate earnings have turned positive and that the OECD leading economic indicator has turned up. After a brief correction in the first quarter, we expect stocks to outperform bonds in 2017 and we will continue to use our proven multi-factor stock selection approach.
CAPSTONE MINING (CS.TO): $1.26; $487 million market cap
Capstone operates copper mines in the U.S. and Chile. Capstone became free cash flow positive in the most recently reported quarter. Free cash flow improved from -$0.21 per share a year ago to $0.001. Cash on hand is estimated at $158 million (32 per cent of Capstone’s market cap). Debt to equity is 0.35X (C+) and total debt to cash flow is 3.6X (C-). Earnings per share grew from minus five cents to positive three cents on a year-over-year basis on a 20 per cent increase in sales per share. Capstone appears attractively priced at 6.7X (B+) EV to EBITDA. Analysts have increased their earnings estimates by 34 per cent in the past 90 days. Earnings are forecast to grow 27 per cent in calendar 2017.
CELESTICA (CLS.TO): $16.09; $1.9 billion market cap
Celestica Inc. is an electronics contract manufacturer for communications, consumer, diversified, servers and storage companies. Celestica provides design and development, engineering services, supply chain management, component sourcing, electronics manufacturing, assembly and testing. Celestica produced $215 million of free cash flow in the most recent four quarters: an 11.1 per cent (A-) free cash flow yield. Celestica has an estimated $600 million cash on hand and its 14.8 per cent trailing ROE (A-) appears attractive. Earnings per share grew 50 per cent on a 22 per cent increase in year-over-year sales per share. At 5.3X (A-) Enterprise Value to trailing EBITDA with year-over-year EBITDA growth of 21 per cent (B+), Celestica’s EV to EBITDA to trailing EBITDA growth ratio of 0.24X (B-) appears attractive. Celestica’s cash flow is forecast to grow 40 per cent in calendar 2017. Celestica reached a settlement in July 2016 to redevelop its 60-acre site in North York. Plans include eight residential high-rises with an estimated average of 30 stories each. From a technical analysis perspective, Celestica’s stock appears to have begun a new monthly up leg. The August 2015 high of $17.65 appears to be the first upside target.
MAGNA INTERNATIONAL (MG.TO): $59.70; $22.4 billion market cap
Magna is an automotive supplier that produces body, chassis, exterior, seating, powertrain, electronic, vision, closure, and roof systems and modules, as well as vehicle engineering and contract manufacturing. Magna produced $1.4 billion of free cash flow in the most recent four quarters: a 6.2 per cent (B+) free cash flow yield. Net debt to equity is modest at 0.28X (C+) while total debt to cash flow appears attractive at 1.05X (A+). With Magna’s modest debt leverage, its 21.4 per cent (A+) trailing ROE appears attractive. Earnings per share grew 33 per cent on a 22 per cent increase in year-over-year sales per share. At 5.3X (A-) EV to trailing EBITDA with year-over-year EBITDA growth of 36 per cent (B+), Magna’s EV to EBITDA to trailing EBITDA growth ratio of 0.15X (B+) appears attractive. Magna’s cash flow is forecast to grow 11 per cent in calendar 2017. Technical analysts note that Magna and many other North American automotive companies appear to be starting new stock price up legs.
PAST PICKS: OCTOBER 16, 2015
- Then: $13.56
- Now: $13.23
- Return: -2.43%
- TR: -2.43%
- Then: $14.28
- Now: $18.64
- Return: +30.53%
- TR: +33.58%
ESPIAL GROUP (ESP.TO)
- Then: $3.80
- Now: $2.27
- Return: -40.26%
- TR: -40.26%
TOTAL RETURN AVERAGE: -3.03%