Robert McWhirter, president of Selective Asset Management Inc.
FOCUS: Canadian equities and technology, industrial and health care stocks

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MARKET OUTLOOK

John Murphy, technical analyst at Stockcharts.com, recently noted that the "U.S. Consumer Staples SPDR (XLP) is surging to a two month high this week...and is challenging a falling trend line drawn over its June/September peaks. Market leadership by consumer staples (and utilities) is usually a sign that investors are turning more defensive on stocks.” Jonathan Golub, chief equity strategist at Credit Suisse, provided insights that investors shouldn’t be concerned about rising interest rates in the near term. “Expectations are for a Fed hike in December and for a tight labor market to put upward pressure on longer-term rates," he says, "raising investor concerns that higher yields will impede the market’s advance."

At what point do rising rates become a burden? P/E has historically moved higher until the 10-year Treasury reaches five per cent. This tipping point has likely fallen to three and a half per cent, in response to the current slower growth environment. With Treasury yields below two and a half per cent today, this implies that stock valuations will not be challenged by rising rates for quite some time.

It’s interesting to note that while the market is concerned about rising interest rates, one technical analyst says rate are headed lower. Jonathan Arter, senior analyst of Taniscott Capital’s Notley’s Notes, recently wrote, “With the long term trend of [U.S.] bond yields about to turn down, yet another catalyst for continued [equity price] expansion could come into play."

We continue to believe the global economic expansion will drive equity prices higher over the next year.

TOP PICKS

Robert McWhirter's Top Picks

Robert McWhirter, president of Selective Asset Management, discusses his top picks: Metro, Rocky Mountain Dealerships and Russel Metals.

METRO (MRU.TO)

  • $9.6 billion market cap
  • MRU is one of the largest grocery store (338 Metro supermarkets) and drug store operators in Canada
  • 1.6 per cent yield,19 per cent payout ratio on four quarter trailing cash flow
  • Reports earnings on November 22, 2017: Forecast $0.65 versus $0.60 = 10 per cent increase
  • Reported August 15, 2017: YOY sales per share are up six per cent; YOY earnings per share are up 7 per cent
  • YOY free cash flow grew five per cent (ttm:$287 million); free cash flow yield is three per cent (C+); ROE ttm:21.4 per cent (A+)
  • 0.9x enterprise value to trailing sales versus six per cent YOY sales per share growth; EV/SALES to SALES growth of 0.15x (C+)
  • Metro’s share count declined by 2.2 per cent YOY; this helped boost per share results. CapitaCube.com shows that MRU’s per share sales, EBITDA and EPS growth rates are above average versus its peers
  • Jonathan Arter, senior analyst of Taniscott Capital’s Notley’s Notes recently wrote that “U.S. consumer staple stocks have started a new intermediate [price] uptrend." We believe MRU’s shares will outperform as well.

ROCKY MOUNTAIN DEALERSHIPS (RME.TO)

  • $0.24 billion market cap
  • RME sells and leases agricultural and industrial equipment in Western Canada
  • 3.7 per cent yield, 35 per cent payout ratio on four quarter trailing cash flow
  • Reports earnings on March 14, 2018: Forecast: $0.35 versus $0.21 = 69 per cent increase
  • Reported November 8, 2017: YOY sales per share up 7 per cent, YOY earnings per share up 23 per cent, 21 per cent earnings surprise (A+)
  • YOY free cash flow grew significantly ($0.61 versus $0.08); free cash flow yield improved to 4.9 per cent (B+) from -0.9 per cent (C-); ROE ttm:10 per cent versus 8.9 per cent last year
  • Earnings estimates have been increased by nine per cent in the last 90 days
  • 5.9x enterprise value to trailing EBITDA versus 10 per cent YOY EBITDA growth = EV/EBITDA to EBITDA growth of 0.61 (C-)
  • Technical analyst Leon Tuey recently noted that RME’s stock has outperformed the S&P 500 and S&P/TSX since early 2016 and recently broke out of a nine year “long base.” Leon’s target of “$21 or higher” implies 69 per cent upside potential

RUSSEL METALS (RUS.TO)

  • $1.7 billion market cap
  • RUS provides metal distribution and processing company in North America. The company operates in three segments: metals service centers, energy products and steel distributors
  • The energy division has been driving near term growth
  • 5.7 per cent yield, 57 per cent payout ratio on four quarter trailing cash flow 
  • Reports earnings on Feb 15, 2018: Forecast: $0.44 versus $0.12 = 3.6x increase
  • Reported November 8, 2017: YOY sales per share up 33 per cent, YOY earnings per share up 117 per cent,17 per cent earnings surprise (A+)
  • YOY free cash flow grew 108 per cent, free cash flow yield improved to 2.5 per cent (C+) from -0.6 per cent (D+), ROE ttm:12.7 per cent versus six per cent last year
  • Earnings estimates have been increased by one per cent in the last 30 days
  • 10.0x enterprise value to trailing EBITDA versus 80 per cent YOY EBITDA growth = EV/EBITDA to EBITDA growth of 0.12 (B+)
  • Technical stock price target of $38 implies 38 per cent upside potential

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
MRU Y Y Y
RME N N N
RUS Y Y Y

PAST PICKS: JANUARY 6, 2017

Robert McWhirter's Past Picks

Robert McWhirter, president of Selective Asset Management, discusses his past picks: Capstone Mining, Celestica and Magna International.

CAPSTONE MINING (CS.TO

  • Then: $1.33
  • Now: $1.38
  • Return: 3.75%
  • Total return: 3.75%

CELESTICA (CLS.TO)

  • Then: $16.17
  • Now: $13.44
  • Return: -16.88%
  • Total return: -16.88%

MAGNA INTERNATIONAL (MG.TO)

  • Then: $59.62
  • Now: $67.60
  • Return: 13.38%
  • Total return: 15.49%

TOTAL RETURN AVERAGE: 0.78%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
CS N N N
CLS N N N
MG Y Y Y

FUND PROFILE
Canadian Dividend Fund
Performance as of: October 31, 2017

1 Month: 3.84% fund, 2.67% index
1 Year: 13.52% fund, 10.69% index
3 Year: 48.27% fund, 17.21% index

*Index: S&P/TSX Total Return Index
*Returns based on reinvested dividends and net of fees

**3 year outperformance: 48.27%-17.21% = 3,106 basis points
**3 year Dollar Value ADD on $100,000 portfolio: $31,060

TOP HOLDINGS AND WEIGHTINGS

  1. Martinrea: 5.4%
  2. West Fraser Timber: 5.0%
  3. Dollarama: 4.8%
  4. Waste Connections: 4.8%
  5. Norbord: 4.3%     

WEBSITE: www.selectiveasset.com