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

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MARKET OUTLOOK

Canada struggles, the U.S. pauses. After a strong rally on the back of a U.S. tax cut, markets have been drifting lower since February. Two issues appear to have held markets in check: rising interest rates and high valuations. While initial Q1 earnings have generally come in ahead of expectations, the bar was set high, and an earnings beat isn’t enough for momentum-driven stocks to move higher. The U.S. bond yield crossing 3 per cent appears to be a valuation headwind, and the Fed comments on further short-term rate increases have only heightened valuation concerns. Recent weakness in banking and tech stocks, clear winners from the positive macro environment, gives us cause to pause. Canada struggles with many issues, and without bank and energy leadership, appears to be a market adrift. We hold higher levels of cash than at the beginning of the year and continue to concentrate fixed income in preferred shares.

TOP PICKS

ENBRIDGE (ENB.TO)

• Enbridge’s 7 per cent yield appears safe. It represents our estimate of long-term equity returns.
• Financing concerns appear to be overblown. The company has many internal levers to pull to generate expansion cash.
• A litany of bad news has created an anti-momentum stock. It reminds us of banks in ’08-’09.

HUDBAY MINERALS (HBM.TO)

• The stock’s weakness reflects misguided macro concerns, not company fundamentals. The market is focused on demand, not supply, of key zinc and copper outputs.
• There’s a possible five-year run from high metals prices: Zinc in 2018 and 2019, copper 2020 and after. Supply is the story.
• Cash generation is substantial, and can support its new Rosemont mine for 2022.  HudBay’s balance sheet substantially improved.

TRICON CAPITAL GROUP (TCN.TO)

• Tricon is a play on U.S. single family homes. It owns and rents 15,000 American homes, primarily in the U.S. Sunbelt, that afford good income growth and hard asset exposure. 
• Their balance sheet improved with recent financing – lengthened term, fixed yield.
• Recent price weakness puts their value well below net asset value (NAV) while NAV can grow at double digits.

PAST PICKS: MARCH 20, 2017

BCE (BCE.TO)

• Then: $57.56
• Now: $54.58
• Return: -5.17%
• Total return: -0.39%

TD BANK (TD.TO)

• Then: $65.60
• Now: $72.24
• Return: 10.12%          
• Total return: 15.08%

PRAIRIESKY ROYALTY (PSK.TO)

• Then: $28.25
• Now: $28.69
• Return: 1.55%
• Total return: 4.31%

Total return average: 6.33%

WEBSITE: vestcap.com