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

Focus: Canadian equities
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MARKET OUTLOOK: SEEKING STABILITY
It has been a difficult half-year for Canadian equities. Despite U.S. and global markets putting in near double-digit returns, the TSX has lagged considerably, struggling to keep its year-to-date return in positive territory. Commodity stocks (energy stocks in particular), have borne the brunt of negative market sentiment, as money flows increasingly concentrate on the few “names that are working,” with large cap U.S. technology names benefiting the most.

As managers with a mandate to preserve and grow the capital entrusted to us, and contrarian investors at heart, we find it disconcerting that the old Buffet adage “be fearful when others are greedy and greedy when others are fearful” is being totally ignored in the context of Canadian equities. The way we see it at Vestcap, resource equities are being valued as if there will be a recession around the corner and growth stocks are being valued as if they are riskless. That is, until they disappoint. 

Our view is that markets will adjust both their pessimism and their optimism. The process may be painful, and for that reason we hold more cash (or preferred shares) than usual. In the names we own, our emphasis is on dividend payers with strong balances sheets. In looking for gains, our preference is to look at the downtrodden names and ask “why not” than to chase the darlings and ask “what next.”

TOP PICKS

NORTHLAND POWER (NPI.TO)
Solid dividend income with near-term catalysts. NPI offers a 4.6 per cent yield and has near-term upside from either a positive resolution of its year-old strategic review or an increase in its dividend from the cash flow from its completed Gemini and Nordsee wind projects in Europe. Further growth from recently-announced Deutsche Bucht wind project. Stock has lagged its peers as of late.

TECK RESOURCES (TECKb.TO)
Well positioned for supply-driven commodity improvement. Not only has TECK increased its dividend and paid down its debt, it should benefit from near-term strength in zinc (rapidly declining inventories), mid-term strength in copper (anticipated supply shortfalls in the 2019 period), a recovery in met coal and perhaps even oil. Discounting material economic slowdown, which we don’t see happening.

CVS HEALTH (CVS.N)
A consumer play not available in the Canadian market place. Good yield (2.5 per cent), solid balance sheet, and significant free cash generator. Despite concerns of lost pharmacy benefit contracts, company has beaten estimates as of late, and has consistently used cash to purchase its shares. Down 25 per cent from highs, bad news seems priced in.
 

PAST PICKS: JULY 5, 2016

EQUITABLE GROUP (EQB.TO)

• Then: $54.99
• Now: $62.19
• Return: +13.09%
• TR: +14.74%

CINEPLEX (CGX.TO)

• Then: $52.25
• Now: $53.18
• Return: +1.77%
• TR: +4.78%

AGNICO EAGLE MINES (AEM.TO)

• Then: $71.93
• Now: $60.93
• Return: -15.29%
• TR: -14.54%

TOTAL RETURN AVERAGE: +1.66%