Ryan Bushell, president at Newhaven Asset Management
Focus: Large-cap Canadian dividend stocks

MARKET OUTLOOK

Much of the strong market performance this year can be attributed to the change of course by the Fed. In the first quarter, Jerome Powell seemingly bowed to presidential and economic pressure and put rate increases firmly on hold to the delight of equity markets.

Our equity portfolios, while up more than 14 per cent on average, lagged slightly behind the market so far this year. Lagging the market during a strong rally is not unexpected, given our defensive strategy. The upside is that we should also drop less during a downturn and ultimately preserve more capital, leading to outperformance on a full cycle basis.

The bond and stock market are sending conflicting signals. The reduction in long-term yields is traditionally a sign from the bond market that safety is valued over risk and expectations for future returns from riskier asset classes like equities as well as inflation are headed downward. However, in the low interest rate world we’ve lived in since 2008 , the stock market has rates as a very positive signal in that lower borrowing costs will increase both spending and margins, resulting in ever higher stock prices.

So far in this tug-of-war where bad news isn’t necessarily bad anymore, the equity market has won out. But this cannot continue unabated forever. Eventually, there will be both a recession and a downturn and the excesses that exist today will be corrected.

TOP PICKS

ARC RESOURCES (ARX.TO)
Recently purchased at $6.30.

I liked this stock much at higher than these levels last year and have continued to average clients down during this period of extreme weakness. Although the apathy towards Canadian oil and gas companies over the past few years is nothing new, I find the recent weakness in ARC’s shares particularly perplexing. The recently completed quarter had the exact same gross profit as the same quarter in 2018 but the shares are down around 50 per cent. On an annual basis, the company had 60 per cent of the EBITDA that they had in a peak year of 2014, but the shares are less than 20 per cent of their peak valuation.

In the past year the company was removed from the TSX 60 and MSCI Canada benchmarks and is outspending cash flow as they bring on a project in B.C. Both of these events likely put pressure on the shares from quantitative and short-term-oriented participants who don’t dig past the headline numbers. When you look deeper at this company, you can see that they’re well balanced between oil, gas and natural gas liquids, have a huge undeveloped land position, and have a management team that’s aligned with shareholders and thinking about the long term. As LNG Canada comes into clearer focus over the next five, years I expect ARC’s outlook to improve. I also expect them to maintain the dividend as they recently cut their capital expenditures program in order to preserve cash flow. Investors who purchase the shares today get a nearly 10 per cent yield to be patient, with lots of upside in the medium to long term.

INTER PIPELINE (IPL.TO)
Recently purchased at $21.70.

We’ve been looking at Inter Pipeline for some time as they’ve developed their polypropylene facility in Alberta. They’ve finally pulled the trigger this month. The market has been concerned about their funding plan, but with the recent rate drop it’s likely the company won’t have to issue further equity to fund the project and may even consider eliminating their dividend reinvestment plan (DRIP) as a signal of confidence. A suspension of the DRIP or an announcement of firm offtake for the facility to be completed in 2022 has the ability to lift shares materially.  I think both are likely to occur in the next six to 12 months. In the meantime, you’re paid a nearly 8 per cent yield to be patient in a sector that has had strong performance year-to-date. I took profits in TC Energy, Altagas, Pembina and Enbridge to fund the purchase, as all of them have outperformed the market so far in 2019.

CIBC (CM.TO)
Recently purchased at $103.

I continue to think there is value in the Canadian banks at these levels. Although declining rates hurts net interest margins, it’s a positive for others areas of the bank including limiting/avoiding credit delinquencies and wealth management. Additionally, stable dividend-paying stocks should command a higher multiple as rates drop.

We’ve seen strong performance in the utilities and energy infrastructure spaces, which are both up more than 20 per cent year-to-date. But not in the Banks, which are up only 12 per cent. CIBC is trading at a three turn discount to RBC and has a significantly higher dividend yield. With the 5.5 per cent dividend yield in your pocket, even a small amount of dividend/share price growth makes for a solid total return on a five to 10 year basis.

PAST PICKS: JULY 3, 2018

MANULIFE (MFC.TO)

• Then: $23.67
• Now: $24.14
• Return: 2%
• Total return: 6%

SCOTIABANK (BNS.TO)

• Then: $74.17
• Now: $69.43
• Return: -6%
• Total return: -2%

ARC RESOURCES (ARX.TO)

• Then: $13.55
• Now: $6.50
• Return: -52%
• Total return: -49%

Total return average: -15%

WEBSITE: newhavenam.com