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

An equity shortage? Markets, especially in the U.S., have been on a tear as of late. While the U.S. Fed scratches its head looking for inflation in all the traditional places, what they are seemingly missing is the asset inflation occurring in financial markets. Or maybe they are ignoring asset inflation altogether, out of fear of the consequences of pricking the balloon. The liquidity creation in the decade since the financial crisis is now concentrating in equities (or other risk assets) with a resulting boom in prices. 

While very good news for owners, with markets hitting new highs every day, the two fundamental questions we focus on as wealth managers are (1) protection of the capital we are entrusted with and (2) generating income from the assets we own. The concept of generating portfolio income by trading assets is one that decades of experience tells us to shun. That said, we are encouraged by the broadening of markets. We have held higher than average cash looking for opportunities, and are now seeing fruit in the new low list. Patience is being rewarded, and we have powder to use when opportunities arise. In our balanced accounts we remain underweight bonds and overweight stocks.

TOP PICKS

ENBRIDGE (ENB.TO)
5.3 per cent yield is too hard to ignore. Recent news on refinancing/equity issue calms investors’ balance sheet fears and sets company up for solid growth run. Dividend growth story intact (better growth than most banks and utilities) and company’s ability to generate stable cash flows is excellent. Recent downdraft in stock was way overdone.

ELECTRONIC ARTS (EA.O)
U.S. “experience” stock. Company has franchise moats in sports gaming. While Madden NFL may be slowing, EA’s flagship FIFA game should benefit from World Cup in 2018. Company has no debt, $11 share in cash, and generates a free cash yield of six per cent. Expect mid-teen growth for next few years and P/E is only 20x, somewhat less than the broader market.

WHIRLPOOL (WHR.N)
Whirlpool has lagged U.S. markets significantly as earnings growth estimates have been pared back. A true global franchise in white goods and stock is very cheap at 10x earnings. Near-term pain caused by higher input costs and slower-than-expected unit sales, especially in Europe. Re-rating opportunity as business recovers with 2.6 per cent dividend to pay us while we wait.

PAST PICKS: NOVEMBER 30, 2016

NORTHLAND POWER (NPI.TO)

• Then: $21.72
• Now: $23.66
• Return: 8.93%
• Total return: 13.98%

GOLDCORP (G.TO)

• Then: $17.73
• Now: $16.25
• Return: -8.34%
• Total return: -7.81%

WELLS FARGO (WFC.N)

• Then: $52.92
• Now: $55.77
• Return: 5.38%
• Total return: 8.35%

TOTAL RETURN AVERAGE: 4.84%

TWITTER: @vestcap1988
WEBSITE: www.vestcap.com