Capital Ideas Media’s Mark Bunting has identified some Canadian stocks operating high-quality, dependable, profitable businesses
Capital Ideas Media | April 22, 2020 | SmallCapPower: Capital Ideas Media Publisher Mark Bunting wrote: Investors have experienced two stomach-churning, panic-driven drops in equities in the last 15 months.
(Originally published on Capital Ideas Media on March 10, 2020)
What have we learned from previous major downturns over the years?
They usually turn out to be good times to add high-quality, dependable, profitable businesses at compelling prices.
And smart money managers and strategists remind us that a big part of successful investing is time in the market and not timing the market. Unless you’re a trader, you’re looking to build wealth over time.
And, of course, the venerable “be greedy when others are fearful” maxim is trotted out at times like these, and rightfully so.
According to Al Root of Barron’s, a look at the historical performance of the Dow Jones Industrials Average shows that it generally pays to buy the dips after sharp selloffs, like the 12.4% fall for the Dow for the week ending Feb. 28. Root writes:
“The Dow has existed for 6,200 weeks, and in that time, the index has declined more than 10% in one week just 17 times—less than 0.3% of the time.
The good news for investors is that after those rare events, stocks have had a tendency to rise in the ensuing four-week and six-month periods.
The average gain in the four weeks after a selloff is 1.1%. The average gain six months later is about 7.5%.
Those might not seem like big gains, but investors do get paid for stepping in a buying in times of turmoil. The Dow has risen 55% of the time in the four-week and six-month periods after a selloff of 10%+ in a week with an average gain for any four-week period of 0.5%. The average gain for any six-month period is 3.5%. More risk nets more reward.”
Yes, there are currently a confluence of macro uncertainties swirling around more than any other time during this longest-ever bull market – coronavirus, an oil price war, pre-emptive central bank interest rate cuts, recession concerns – and there are trades to be had around the margins of the markets in gold, volatility, leveraged ETFs, etc.
But now’s the time during this turmoil to unemotionally block out the panic and dire predictions, roll up the sleeves to consider some good, long-term, investment ideas.
To assist in that endeavour, we turn to RBC Capital Markets’ Global Equity team of analysts who’ve assembled their 53 highest conviction Canadian and U.S. stock ideas (some dual-listed).
That sounds unwieldy, right?
We’ve pared the list down to 15 names (five of which we will mention today), 11 Canadian and four U.S., based on the highest projected returns to their target prices, low exposure to China, sector, perceived competitive advantages and, frankly, personal preference.
Here’s our digestible summation of RBC’s list of their highest conviction ideas trading at compelling prices:
Following several days of volatility in the market, we thought it would be timely to remind investors of some of our highest conviction ideas.
The current sell-off in the market provides an opportune time to add to these high quality businesses that we believe are attractive at current prices.
This list is meant to be a resource during a volatile market environment.
Fortis Inc. (TSX:FTS) (NYSE:FTS)
Rating : Outperform
Target: $63 (Canadian)
“We continue to view Fortis’s shares as the “go to” defensive Canadian regulated utility stock, as almost 100% of its earnings is expected to come from regulated and/or long-term contracted utility infrastructure.” – RBC Capital Markets
We see the stock being attractive given utility stocks’ historical “defensive” outperformance in bear markets, as well as current valuations being supported by the very low interest rate environment.
The stock sports an almost 3.5% dividend yield and we expect roughly 6% annual dividend growth underpinned by investments in regulated utility rate base that we forecast will drive rate base growth at a roughly 7% compound annual growth rate (CAGR).
Waste Connections, Inc. (TSX:WCN) (NYSE:WCN)
Rating: Outperform
Target: $111 (U.S.)
Well protected from coronavirus concerns.
Waste Connections is being largely insulated from potential impacts related to the coronavirus.
There was no commentary on the subject during the company’s recent Q4/19 conference call and WCN generates no revenues and has no operating infrastructure in any of the regions meaningfully affected by the virus.
The only impact we see the virus having on the company would be through a broader global economic slowdown/recession that materially affects economic activity in the U.S. and Canada.
WCN’s core defensive characteristics are:
- An industry-leading growth profile.
- Robust and sustainable free cash flow (FCF) generation.
- Top-notch management team.
We see the company as a core holding in any portfolio and a compelling “safe haven” investment in a more volatile market environment.
Kirkland Lake Gold Ltd. (TSX:KL) (NYSE:KL)
Rating: Outperform
Target: $50 (U.S.)
Our “outperform” rating for KL is predicated upon the company’s favourable combination of growth, margins, and exploration expected at a competitive relative valuation to the peer senior producer group average.
Following KL’s acquisition of Detour Gold, we estimate that pro-forma KL-DGC maintains first-quartile operating costs, higher production growth, comparable asset duration, and no financial leverage while generating superior FCF relative to peers.
FCF generation is expected to fund KL’s considerable returns to shareholders including its 20 million share repurchase program over 1–2 years (~7% of shares outstanding or ~$725 million (U.S.)…
…as well as the doubling of its quarterly dividend to $0.125/share or 1.4% yield (~$145 million/year).
Exploration is a key value driver for KL.
Fosterville and Maccassa have generated meaningful upside. Forecast mined grade declines at Fosterville represent an interim challenge and risk; however, this is largely priced into KL shares following the company’s recent reserve update.
At Detour Lake, higher throughput/resources are under evaluation, while a larger expansion has been discussed.
First Capital REIT (TSX:FCR.UN)
Rating: Top Pick
Target: $25 (Canadian)
FCR owns 158 urban-concentrated retail and mixed-use properties in Canada, comprising 21 million square feet of gross leasable area (GLA).
Its portfolio is predominantly weighted in defensive, grocery-anchored properties that cater to the “everyday needs” of consumers.
Equipped with a fully integrated real estate management platform, we believe FCR is well positioned to create above-average long-term value through:
- Superior organic net operating income growth supported by its significant presence in urban markets;
- Repositioning and redevelopment of existing centres;
- A substantial pipeline of mixed-use intensification opportunities across its portfolio; and
- Strong capital allocation. Management is prudently focused on reducing leverage through dispositions, a process that we expect to be largely completed over the next 12 months.
Coupled with a heightened focus on unlocking embedded value through the rezoning process, solid outlook for net asset value growth, rising super urban market penetration, and anticipated TSX REIT Index inclusion in March 2020, we believe a framework is in place to support a stronger valuation.
Cargojet Inc. (TSX:CJT)
Rating: Outperform
Target: $132
Limited impact on underlying business.
While we expect the interline business to remain under pressure in Q1 due to COVID-19, this represents a small percentage of the overall business (~10%).
Otherwise, management expects the aircraft, crew, maintenance, insurance (ACMI), charter, and e-commerce businesses to be mostly unaffected.
E-commerce continues to grow by double digits, which we expect to continue until penetration rates reach those of the U.S. or Europe.
The growth in e-commerce has also allowed the company to improve asset utilization, a positive for margin growth and capital intensity.
Impressive fundamentals.
We remind investors that CJT has an impressive competitive positioning within the niche time-sensitive overnight cargo segment in Canada.
The company controls ~95% of the domestic overnight cargo business, benefits from long-term contracts with solid customers, and boasts ~75% contracted volumes.
We view the recent decline in CJT shares as a rare buying opportunity and recommend that investors take advantage of the current weakness.
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