Good afternoon all and welcome to this Tuesday’s live chat. I’m Luke Kawa, an investing reporter with Inside the Market. The good times are back on Bay Street – at least for today - with crude on a tear and the TSX up nearly 200 points. Bruce, thanks for joining us.
I will start with a bit about what we invest in and how we go about selecting companies.
That'd be wonderful, thank you.
We focus on Canadian large and small cap companies, primarily the larger ones but we add some smaller companies to spice it up in certain areas of the market.
We are fundamentalists. Our focus is on free cash flow generators that can return money to shareholders in numerous ways: earnings, dividends and buybacks.
One recent example would be Agrium:
The Canadian market is funny
, energy, financials and materials are 70% of it.
So, you have to have a view on those groups.
We have been way underweight energy and materials for quite awhile.
It looks like energy is trying to put in a bottom and the stocks are rebounding sharply. We would be a bit careful as this will not be a straight line up.
Still, focus on good balance sheet companies that can survive this and prosper in the recovery.
Examples would be Crescent Point, Whitecap and Tourmaline.....
One thing on Crescent Point.
In early December, you told our John Heinzl that it would take a half a year of sub-$55 WTI for Crescent Point to consider cutting its dividend. Unlike many in the group, it hasn’t announced any reductions to its payout – so cheers for that advice – and it’s outperformed the iShares S&P TSX Capped Energy Index Fund (ticker symbol XEG) by double-digits since then. Do you still own the name, or have you taken something off the table after this run? And for someone who wants to put money the space, are there other options you prefer that might be a little more attractively valued?
CPG, we still own. In oil-focused names, the premier ones have recovered to a level that I wouldn't chase right now.
That would be CPG, WCP and even CNQ. Those would be our oily favourites but buy ranges are a bit lower than today.....
On gas, we like Tourmaline and Paramount.
In materials, we have stayed away from gold mostly and our favourite is Agrium.
It is a cash flow machine, also recently raised the range at which it will payout dividen
ds to shareholders going forward.
Smaller cap areas of the market would be health care where there are lots of names
that you can look it that are attractive: PLI, PHM and MSL are the ones we own.
Here's a question from a reader asking why you prefer Agrium to Potash Corp.
Potash does have
a higher yield but Agrium is a bit more diversified.
I like the retail side of Agrium which provides a bit of smoothing to earnings so makes AGU a bit safer.
HAving said that, POT is fine to hold.
The problem with AGU right now is that it has moved sharply so would wait for a pullback as an en
Even though manage equities, I'm sure you have a rates strategy that informs a lot of your decisions. So far, 2015 has been the year of central bank surprises --- and yields have been plumbing new lows. Do you expect that to be a theme for the year, or should investors be ready for rising rates? How would that affect your approach?
It looks like rates are not going to rise anytime soon. For now, REITs and utilities and telecoms do well as rates stay low.
When rates do rise later in the year or in early 2016, you would want to de-emphasize those groups and look to insurance and banks to do well under that scenario.
You mentioned the telecoms – of the big three, do you have a preferred pick?
BCE has done great but now looks expensive and is a hold. Telus has a bit better outlook than Rogers. We sold our Rogers awhile ago. None of them are as appealing as they were 6 months ago.
The group is only a buy on a pullback, 5% lower would make sense.
Here's a question from a reader:
Arc is a well-managed company. A mixture of both oil and gas with a decent balance sheet. They raised equity in the fall to ensure no further problems. They would be a preferred holding going forward.
I think the stock will be one to recover at the front of the group but it may pullback from today's price to a better entry level in the next little while.
Right now, given the backdrop in Canada – slow growth is expected, and the five-year yield has been cratering since about a month before the Bank of Canada’s cut – do you have a bias towards searching for more value, growth, or yield plays?
Given the backdrop, the yield plays are mostly fully valued. We are always searching for value but it is a bit harder to come by right now.
The growth stocks have often gotten hit and so there are some there with good value.
Although we don't own it, AutoCanada has been slaughtered and we are going to have a look. I also like Avigilon (AVO) which, if they report a good quarter, has lots of room to the upside after missteps last year.
When looking for yield make sure you don't just go for the highest yield, it often means a cut is coming. We look for payout ratio on forward earnings to tell us how sustainable the dividend is.
There are some smaller cap yield plays that are good value as they are under the radar. One example would be ED.un which is Edgefront REIT. Almost a 9% yield and a low payout but it a small mkt cap so doesn't get the same attention.
I had the CEO in my office last week and the story is intact. Some Western Canadian buildings in their portfolio but no direct energy exposure.