Mar 23, 2017

Norman Levine's Top Picks: March 23, 2017

BNN Bloomberg

Norman Levine , BNN

Norman Levine, managing director at Portfolio Management Corporation

Focus: North American large caps
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MARKET OUTLOOK
Stocks in the U.S. have generally been on fire since the presidential election, especially financial stocks. Not so much in Canada. We did somewhat mirror the U.S. move, with our market dominated by financials and energy stocks. First, the energy stocks failed as the prices of oil and natural gas declined rather than increased like the stocks did. Something had to give, and it was the overvaluation of energy stocks. Financials in the U.S. were on a tear based on hopes for less regulation and higher interest rates, enhanced with a steepening yield curve. Canadian financials followed suit. A lighter regulatory environment is still the most likely outcome from the Trump administration and higher yields are also likely, but the market was pricing in interest rates going straight up, and that doesn’t appear to be what’s happening. Hence, we believe we are in the early stages of a much needed correction. Valuations on most companies were getting ahead of their fundamentals. We view a correction as a buying opportunity as we believe that a stronger U.S. economy will be good for corporate earnings and that the U.S. economy will drag weaker economies along with it. Our bigger concern is interest rates. Stock corrections and even bear markets are cyclical, and markets recover and move onto new highs. Interest rates don’t have to go that much higher to end the 35-year bull market in bonds and signal a secular and generational shift to higher interest rates down the road.

TOP PICKS

BADGER DAYLIGHTING (BAD.TO) – Owned by clients, self, and family. We last purchased Badger in April 2011 at $6.35 and are purchasing for new clients at current levels.
Badger is North America's largest high-pressure water excavating company. Its main customers are utilities and energy companies who need to move earth without disturbing existing infrastructure. The growth for this company has largely been in the United States as it has been building its presence in that market. The U.S. currently accounts for 68 per cent of Badger’s revenue.When we first bought Badger, energy and non-oil and gas each accounted for about half of the company’s revenue. In 2016, energy accounted for only 25 per cent of Badger’s revenues, yet the market still looks at it as an energy-related stock — hence the opportunity. We think that the ongoing weakness in the energy area, especially in Canada, has given investors a buying opportunity in the stock. While originally bought as an income stock, its current yield is 1.2 per cent.

SNC-LAVALIN (SNC.TO) – Owned by clients, self, and family. We originally purchased the stock on March 30, 2012 at $42.22 and are purchasing for new clients at current levels.SNC is one of the world’s premiere engineering and construction companies. Under new senior management, it has emerged from its scandals of a few years ago a much better-run company. Despite the headlines of past infractions, new business has been coming unabated. Under the Trudeau government’s infrastructure spending plans, we expect SNC to be a major beneficiary (although we are all waiting for some sign of that infrastructure money being spent) and despite its previous problems, SNC is entitled to bid on and expected to win a significant amount of business in the next few years. We expect margins to increase at SNC and the company is underleveraged compared to its competitors, so we expect it to make some significant acquisitions in the next couple of years, using mostly debt, to increase its earnings potential. The possible sale of its stake in Highway 407 could be a major catalyst for the stock. SNC is currently the cheapest engineering and construction company in North America due to the expectation they will make a major acquisition in the near future. We view this as a positive, not a negative, as that is how their growth will be fuelled. In addition, SNC could become a major buyer of their own shares as they are so cheap. The dividend has been increased annually and an increase was announced with the next payment. SNC currently yields 2.1 per cent.

PARKLAND INDUSTRIES (PKI.TO) – Owned by clients, self, and family. We have owned Parkland for quite a number of years and are purchasing for new clients at current levels.Parkland is a fuel-products distribution company with operations mostly in Western Canada. Gas stations are its largest business but it also has wholesale and commercial operations. It has grown rapidly over the years through acquisition, with the most recent major acquisitions being Pioneer Energy in Eastern Canada in the past year and Chevron stations in Western Canada. The pending acquisition of the Canadian CST stations (Valero and Golden Eagle) in Eastern Canada will give Parkland more of a national presence. Despite these recent acquisitions, there are a number of possible major acquisition targets in both Canada and the northern U.S. becoming available, and we expect Parkland to be an active bidder and to be successful in many of its bids. These acquisitions fuel its growth (pardon the pun). The stock currently yields 4.1 per cent and we expect continued small incremental increases to the dividend in the future.