Lyle Stein, senior portfolio manager and managing director at Vestcap Investment Management

Focus: Canadian equities
_______________________________________________________________

MARKET OUTLOOK

Despite a late-2017 rally, the S&P/TSX continues its lagging ways, with energy continuing to be a weight on the market’s back. We are watching three trends closely. First, and foremost, is the continued climb in long bond yields, with the U.S. 10-year Treasury yield as our focus. A yield over three per cent (current yield at 2.7 per cent) appears to be a key level for asset reallocation. Second, is the level of the Canadian dollar, which at US$0.815 makes little sense given the relative directions of the two economies. At this level, U.S. names, particularly U.S. franchises, look relatively better. Third is the depressed, made-in-Canada oil price. The lack of egress from Western Canada is a problem not just for energy stocks, but for the fiscal stability of the entire country. In general, the advance in markets over the past year has left valuations stretched — we remain cautious and are content to earn steady income and protect capital. We will leave the chase for further multiple expansion to traders. We continue to avoid bonds in favour of preferred shares.

TOP PICKS

CAE INC. (CAE.TO) $22.65
World leader in flight-training simulation. Benefits from two trends: increasing airline outsourcing of simulation/training and a growing shortage of pilots. Military simulation an increasing share of CAE business. Well-capitalized, free-cash generator with history of raising dividend. Cheap relative to peers, and not expensive on its own (10xEV/EBITDA). Low expectations.

PAYCHEX (PAYX.O) $67.50
North American payroll/HR outsourcing with focus on small and medium business. One out of 12 American private sector workers covered by PAYX. Steady growth in all metrics (six to eight per cent), PAYX is well capitalized, has high ROE, and is a dividend grower with a current dividend yield of three per cent. Should be a major beneficiary of tax reform.

AGNIGO EAGLE MINES (AEM.TO) $57.75
Go-to name in gold. Strong production growth (30 per cent ’18 to ’20), and low-cost (AISC<$750/oz) metrics are some of the best in the industry. Well managed, well financed, and with its operations in some of the world’s best mining jurisdictions, we view Agnico as a great company that happens to be in the gold/mining sector, an area which has seen limited liquidity inflows. Steady history of dividend growth.
 

PAST PICKS: FEB. 2, 2017

TRANSCANADA SERIES 4.9% 15 1ST PREFERRED (TRP_pk.TO)

• Then: $25.67
• Now: $25.91
• Return: 0.93%

MANULIFE FINANCIAL (MFC.TO)

• Then: $24.63
• Now: $25.70
• Return: 4.34%
• Total return: 7.82%

ZIMMER BIOMET HOLDINGS (ZBH.N)

• Then: $117.62
• Now: $127.08
• Return: 8.04%
• Total return: 8.90%

TOTAL RETURN AVERAGE: 5.88%