Robert McWhirter, president of Selective Asset Management

Focus: Canadian dividend and growth stocks
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MARKET OUTLOOK
The U.S. Q1 GDP report will be released Friday morning. There appears to be a wide range of GDP growth expectations. In spite of any seasonal economic weakness, economists still expect two additional rate increases in 2017. U.S. 10-year bond yields have moved in a sideways band ranging between 2.3 per cent and 2.62 per cent since November 2016. If the 10-year bond yield (now 2.33 per cent) rises above 2.40 per cent, a new intermediate technical analysis bond yield buy signal will be given (as bond yields rise, bond prices will head lower). It would be significant if the U.S. 10-year bond yield rose above the 2.63 per cent level set on March 14, 2017. This would likely be seen as reflecting rising economic growth expectations and would be viewed favourably by the equity markets. The trailing P/E multiple for the S&P/TSX Composite index is 27.0x, with 21 per cent trailing earnings growth giving a trailing P/E to earnings growth (PEG) ratio of 1.3x. A PEG ratio of less than 1x is typically viewed as attractive. In 2017, earnings for the S&P/TSX Composite are forecast to grow 23 per cent, giving a 17.0x P/E multiple and an attractive PEG ratio of 0.75. We continue to expect that North American equity markets will continue to rise in 2017.

TOP PICKS

Due to live event coverage of U.S. President Donald Trump's tax plan, Robert McWhirter did not discuss his Top Picks during Wednesday's episode of Market Call. Video will not be made available.

LOBLAW (L.TO) – Purchased at $73.68; $29.5 billion market cap; a food retailer and provider of drug stores, general merchandise and financial products and services.

  • 1.4 per cent yield, 12 per cent payout ratio on fourth-quarter trailing cash flow.
  • To report earnings on May 3, 2017; forecast: $0.88 versus $0.83 = +seven per cent
  • Reported February 23, 2017: Year-over-year sales per share up four per cent, year-over-year earnings per share up 12 per cent, zero per cent earnings surprise
  • Gross margin grew three per cent year over year, 28.4 per cent versus 27.6 per cent; year-over-year cash flow from operations grew 55 per cent; year-over-year free cash flow grew 40 per cent
  • Free cash flow yield improved to 7.1 per cent versus 5.4 per cent, ROE 13.0 per cent; 18x trailing P/E versus 12 per cent year-over-year EPS growth gives a P/E to EPS growth ratio (PEG) of 1.6x (D+)
  • Forecast 2017: 16.7X P/E versus eight per cent forecast EPS growth = 1.75x P/E to growth (D+); 9.4x enterprise value to trailing EBITDA versus 10 per cent EBITDA growth = EV/EBITDA to EBITDA growth of 0.94x (D+)
  • CFAF/Price 10.1 per cent (B-) versus a year ago CFAF/Price 8.9 per cent (C-); year-over-year CFAF/Price change 13 per cent (C+)

NEW FLYER INDUSTRIES (NFI.TO) – Purchased at $49.86; $3.1 billion market cap; the largest transit bus and motor coach manufacturer and parts distributor in North America with fabrication, manufacturing, distribution and service centers in Canada and the United States.

  • 1.9 per cent yield, 23 per cent payout ratio on fourth-quarter trailing cash flow
  • To report earnings on May 11, 2017; forecast: $0.68 versus $0.56 = +22 per cent
  • Reported March 23, 2017: Year-over-year sales per share up 36 per cent (A-), year-over-year earnings per share up 67 per cent, three per cent earnings surprise
  • Gross margin grew 36 per cent year over year, 18 per cent versus 13 per cent; year-over-year free cash flow grew 83 per cent; year-over-year cash flow from operations grew 27 per cent; free cash flow yield improved to 4.8 per cent (B-)versus 3.7 per cent (B-), ROE 22.7 per cent (A+)
  • 17.7x trailing P/E versus 67 per cent year-over-year EPS growth gives a P/E to EPS growth ratio (PEG) of 0.26 (B-)
  • Forecast 2017: 16.1x P/E versus eight per cent forecast EPS growth = 1.6x P/E to growth (D+); 9.9x enterprise value to trailing EBITDA versus 75 per cent year-over-year EBITDA growth = EV/EBITDA to EBITDA growth of 0.13 (B+)
  • CFAF/Price 5.5 per cent (C+) versus a year ago CFAF/Price 2.1 per cent (C-); year-over-year CFAF/Price change 167 per cent (A+)

NEXJ SYSTEMS (NXJ.TO) – Purchased at $4.60; $97 million market cap; provides cloud-based enterprise customer management software solutions to the financial services and insurance industries

  • To report earnings on April 27, 2017; forecast: $0.07 versus -$0.03
  • Reported February 15, 2017: year-over-year sales per share up 22 per cent, year-over-year earnings per share up 97 per cent; one per cent earnings surprise.
  • Gross margin grew 14 per cent year over year: 65 per cent versus 57 per cent
  • Year-over-year free cash flow grew 83 per cent
  • Free cash flow yield improved to 4.1 per cent (B-)versus -1 per cent; ROE 19.6 per cent (A)
  • 30.0x trailing P/E versus 97 per cent year-over-year EPS growth gives a P/E to EPS growth ratio (PEG) of 0.31 (B-)
  • Forecast 2017: 17.0x P/E versus 58 per cent forecast EPS growth = 0.3x P/E to growth
  • Forecast 2018: 14.4x P/E versus 18.5 per cent forecast EPS growth = 0.8x P/E to growth (C+)
  • CFAF/Price 3.1 per cent (C-) versus a year ago CFAF/Price 2.2 per cent (C-); year-over-year CFAF/Price change 41 per cent (A+)
     
DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
L Y Y Y
NFI Y Y Y
NXJ N N N


PAST PICKS: JULY 21, 2016

Robert McWhirter - Past Picks

Robert McWhirter of Selective Asset Management reviews his past picks: Loblaw, New Flyer Industries and NexJ Systems.

HEROUX-DEVTEK (HRX.TO)

  • Then: $15.30
  • Now: $12.10
  • Return: -20.91%
  • TR: -20.91%

TECSYS (TCS.TO)

  • Then: $10.66
  • Now: $11.46
  • Return: +7.50%
  • TR: +8.81%          

TIO NETWORKS (TNC.V) – PayPal acquired TIO Networks in February 2017

  • Then: $2.39
  • Now: $3.31
  • Return: +38.49%
  • TR: +38.49%

TOTAL RETURN AVERAGE: +8.79%
 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
HRX N N N
TCS N N N
TIO N N N


FUND PROFILE: CANADIAN DIVIDEND FUND

PERFORMANCE AS OF MARCH 31, 2017:

  • 1 month: Fund 2.89%, Index* 2.24%
  • 1 year: Fund 12.52%, Index* 11.48%
  • 2.75 years**: Fund 33.03%, Index* 9.17%

* Index: TSX Total Return Index
** 2.75-years return is (simple) cumulative return


TOP HOLDINGS AND WEIGHTINGS

  1. Waste Connections (WCN): 4.7%
  2. New Flyer Industries (NFI): 4.4%
  3. Martinrea International (MRE): 4.4%
  4. Canadian Tire (CTC.A): 4.3%
  5. Norbord (OSB): 4.3%


WEBSITE: selectiveasset.com