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Christian Godin

Portfolio Manager’s March comment For February Results

The Canadian stock market realized one of its worst performance in February. This negative outcome unfolded as growing concerns on the economic impact of the COVID-19 was being factored in investor expectations. Given the elevated level of equity markets, the COVID-19 was the perfect trigger for a market correction.

The S&P/TSX Total Return Index declined by 5.9% in February and the S&P 500 also declined by 8.2% while the MSCI ACWI ex. USA lost 7.9%. At February end, the 12-months S&P/TSX Total Return Index gain was 4.9% behind the S&P500 gain of 8.2% and higher than the MSCI ACWI ex. USA who was flat.

The best TSX sector for the month of February was Information Technology down 2.7%, followed by Utilities down 3.1%, and Real Estate down 3.8%. On the contrary, the worst performing sectors were Health Care (-16.7%), Material (-7.6%) and Energy (-7.5%).

The best performers in February were Brookfield Asset Management (-0.9%) Constellation Software (-1.7%) and TFI International (-2.3%). Brookfield Asset Management trades as a bond equivalent and performs relatively well when long term interest rate decrease and the market considers IT stocks like Constellation Software isolated from the COVID-19 economic impact. At the opposite, the weakest contributors were CCL Industries, which was down 20.6% on very disappointing results as organic growth missed by a wide margin, Kirkland Lake Gold was down 20.2% due to poor production gold grade in Fosterville and Equitable group was down 15.4% because of low guidance despite better than expected results.

 

Portfolio Manager’s February Comment for January Results

The Canadian stock market as defined by the S&P-TSX posted another positive return for the month of January. This positive outcome took place despite global worries resulting from the coronavirus potential impact on the economy.

Last month, the S&P/TSX TR realised a 1.7% return, while the S&P500 TR was essentially flat and the MSCI ACWI ex USA declined by 2.7%. On a one-year basis, the S&P/TSX TR was up 15%, the S&P500 TR posted a 21.7% return while the MSCI ex USA lagged with a 10.5% return.

The best TSX sector for January was Information Technology up 9.4% followed by Utilities up by 7.6%. The worst sector for the month was Health Care down 2.6%.

The NQICAT was up 1.5% in January and 16.6% on a one-year basis. The NQICAT’s best performer was Brookfield Infrastructure (BIP.UN) up 11.1% closely followed by Constellation Software (CSU). BIP.UN was up in sympathy with other Utility stocks rallying as long term interest rate were coming down.

The worst performer was Parex Resources (PXT) the only oil stock of the portfolio. Every energy producer’s stocks price of the S&P-TSX Index came down in January. Energy producers were negatively impacted by a weaker outlook for oil demand, again caused by the fears around the Coronavirus and its impact on the economy.

2 stocks were sold and bought in the strategy in January. Norbord (OSB) was sold because its economic performance indicator turned negative. OSB cost of capital was higher than its return on capital as a consequence of its most recent quarterly report. OSB was replaced by Kirkland Lake Gold (KL). KL had the highest SP score in the material sector. Ritchie Bros. Auctionneers (RBA) was the other stock sold. The industrial sector EVA weight had having declined in the aggregate total profit. We had to sell the lowest SP score stock of the industrial sector which happened to be RBA. The consumer discretionary sector weight increased and MTY food group (MTY) was the stock with the best SP score in its sector that was not already in the portfolio.

10 Canadian midcap stocks with good momentum

What are we looking for?

At least until Monday’s pullback, the S&P/TSX Composite Index has been on a great run, rising more than 3 per cent this year as of Friday’s close. Investor sentiment driven by expectations of a positive earnings season, a stable economic outlook and the China-U.S. Phase 1 trade deal have helped the market reach new record highs in 2020. Investor sentiment, driven by expectations of a positive earnings season, a stable economic outlook and the China-U.S. Phase 1 trade deal, have helped the market reach new record highs in 2020.
Today, we look for Canadian mid-cap stocks that had a good run in the short term, and where price gains are supported by fundamentals such as sales and profitability.
The screen
We screened the Canadian companies by focusing on the following criteria:
•Market capitalization greater than $500-million and lower than $3-billion;
•Price change over one month higher than 2 per cent – we are looking for companies with a positive momentum in the very short-term;
•Price change over three months higher than 6 per cent – we are looking for companies with a positive momentum in the short-term;
•A return on capital more than 7 per cent – we want to find profitable companies that have a good return on investment;
•Sales growth higher than 10 per cent over 12 months – we are looking for a growing company. (Sales growth of 10 per cent may seem like a lot, but smaller companies can grow more easily than big ones);
For informational purposes, we have also included recent stock price, dividend yield and one-year price return. Please note that some ratios may be reported at the end of the previous quarter.
What we found
We found 10 companies with these criteria, with the accompanying table ranked by 12-month sales growth. K92 Mining Inc. tops the table, realizing huge sales growth over the past year. The return on capital is also a lot higher than our threshold, sitting at 50.9 per cent. Note: Results can be quite volatile for mining companies and we need to be careful with the short track record of this company.
Aside from K92 Mining, Wall Financial Corp. and Heroux-Devtek Inc. have had big years, with 72.9 per cent and 51.1 per cent, respectively, in sales growth. Wall Street Financial has shown strong price momentum over the past three months while Heroux-Devtek has done quite respectably over the past month.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Ticker Name PRICE ($) EXPECTED DIV. YIELD (%) MARKET CAP. ($M) 3M PRICE RETURN (%) 1M PRICE RETURN (%) RETURN ON CAPITAL Sales Ch. 12M (%) 1Y PRICE RETURN (%)
KNT-X K92 Mining, Inc. 3.48                                                  –                            740.10                                  35.21                                  20.83                                  50.87                          192.20                                242.86
WFC-T Wall Financial Corporation 35.95                                            5.58                        1,220.62                                  37.51                                    7.06                                  11.86                            72.91                                  39.97
HRX-T Heroux-devtek Inc. 20.08                                                  –                            730.15                                  11.05                                    5.13                                  9.95                            51.07                                  47.72
PEO-X People Corporation 10.48                                                  –                            713.80                                  10.95                                    4.49                                  10.29                            23.17                                  37.68
GSY-T Goeasy Ltd. 73.39                                            1.69                        1,052.71                                  16.77                                    5.52                                  22.18                            22.23                                  94.44
REAL-T Real Matters, Inc. 12.75                                                  –                        1,083.06                                  11.59                                    3.49                                  7.34                            18.46                                273.33
ATZ-T Aritzia, Inc. 25.08                                                  –                        2,733.08                                  13.46                                  31.65                                  26.96                            15.47                                  16.16
ENGH-T Enghouse Systems Limited 52.25                                            0.85                        2,860.03                                  32.00                                    8.45                                  18.63                            12.54                                  45.10
HCG-T Home Capital Group Inc. 33.76                                                  –                        1,935.50                                  27.90                                    2.43                                  7.96                            11.59                                128.89
ET-T Evertz Technologies Limited 18.3                                            3.94                        1,405.47                                    7.40                                    2.46                                  17.89                            10.65                                  10.32

Dividend Paying Stocks in the Gold Sector

WHAT ARE WE LOOKING FOR?
Gold is reaching price highs not seen since 2013, because of dovish central banks and the geopolitical volatility caused by the U.S.-China trade war and, most recently, the U.S.-Iran crisis. Gold is up 21 per cent over the past 12 months. Expect gold miners to report better results in their next quarterly reports. Today, we will be looking more closely at gold miners that pay a dividend. The yield is our proxy for stable operations and we use the change in net operating profit after tax, or NOPAT, to find growing companies.
For the Globe and Mail this week, we look at dividend stocks in the volatile gold sector.

THE SCREEN
We screened the Canadian- and U.S.-listed gold miners by focusing on the following criteria: Market capitalization greater than $1-billion; Dividend yield; 12-month and 24-month change in the company’s NOPAT – appositive figure would indicate that there is growth and progress in operating efficiencies. For informational purposes, we have also included recent stock price, cost of capital (a weighted cost combining equity and debt, expressed as a percentage of total capital) and one-year return. Please note that some ratios maybe reported at the end of the previous quarter.

WHAT WE FOUND
Only 11 gold miners with a market capitalization of more than $1-billion pay a dividend.

Centamin PLC pays the highest dividend by far, but its negative NOPAT change over both 12 and 24 months suggests future dividend growth may not be sustainable. Newmont Goldcorp Corp., Royal Gold Inc., Yamana Gold Inc. and Kirkland Lake Gold Ltd. all show growing NOPAT over the past 12 and 24 months.

As the largest company on our list, suggesting more stable operations than smaller companies in this highly volatile sector, Newmont is well positioned to maintain and increase its dividend. Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Ticker Name PRICE ($) 1Y PRICE RETURN (%) MARKET CAP. ($BIL) EXPECTED DIV. YIELD (%) LAST QTR DIV. YIELD (%) COST OF CAPITAL (%) NOPAT CH. 24M (%) NOPAT CH. 12M (%)
CEE-T Centamin Plc 2.12 5.37 2.45 4.40 4.00 9.74 -5.61 -3.61
OR-T Osisko Gold Royalties Ltd 12.27 0.5 1.77 1.60 1.62 5.93 0.02 -0.30
NGT-T Newmont Goldcorp Corporation 55.15 28 45.22 1.31 1.48 5.65 1.46 2.07
ABX-T Barrick Gold Corporation 23.29 40.59 41.40 1.08 1.17 5.75 -1.93 0.55
AEM-T Agnico Eagle Mines Limited 77.44 44.66 18.51 1.15 0.91 5.95 -0.88 -0.19
RGLD-Q Royal Gold, Inc. 113.79 33.33 7.46 0.77 0.86 6.20 0.68 1.69
YRI-T Yamana Gold Inc. 4.86 45.4 4.62 1.03 0.79 10.85 0.62 2.26
AGI-T Alamos Gold Inc. 7.5 41.98 2.93 0.70 0.69 9.97 -2.12 -0.86
SVM-T Silvercorp Metals Inc. 7.18 135.59 1.24 0.44 0.65 14.75 -0.32 0.34
BVN-N Compania De Minas Buenaventu 13.97 -14.42 3.54 0.60 0.55 6.57 -7.61 -8.19
KL-T Kirkland Lake Gold Ltd. 58.33 60.15 12.26 0.42 0.31 8.12 4.31 2.86

Portfolio Manager’s January comment For Q4 2019

Global equities ended the year with a bang! The S&P/TSX Composite Total Return Index increased by 3.2% in Q4 adding to this years’ gains for a total return of 22.9% in 2019. During Q4, the S&P500 produced an 8.5% return for an annual total return of 28.9% while the MSCI ACWI ex US posted a 9.0% return leading to a 22.1% YTD total return.
There was a number of drivers behind this strong finish. Firstly, most company’s results were inline or better than expected, secondly central banks have maintained a dovish tone, and finally the year ended with a phase one agreement between the US and China.
In Canada, the best Q4 sectors were Info-Tech up 10.7% and Materials up 7.4%, the worst sector was Healthcare down 6.0%. For the year, Info-Tech and Utilities were the top performers up 63.5% and 31.6%, respectively, while Healthcare was the weakest on, down 11.4%.
NQICA in Q4 returned 2.5% leading to an annual total return of 24.1% versus the S&P/TSX TR composite which returned 3.2% in Q4 and 22.9% YTD.
The worst performers in the NQICA in Q4 were Gildan Activewear (GIL) with a return of -18.1%, due to lower than expected results, and Metro (MRU) with a -7.8% return. On the other hand, the best performers were Parex up 19.0%, due to excellent results and new field discoveries, and National Bank up 10.4% on the back of an excellent Q4.

Retailers that are no Christmas Gifts

What we are looking for?

With Black Friday still fresh in our minds we decided to look at North American retailers that may look tempting based on yield but that face deteriorating economics. More precisely we selected dividend-paying stocks and we screened them based profitability trends and other fundamental quality criteria.

 

The screen

We screened for consumer discretionary stocks based in North America, specifically, those stocks listed in the subsectors of retailing or consumer durables and apparel. We then added the following criteria:

  • A market capitalization greater than US$1-billion;
  • Stocks must pay a dividend;
  • Return on capital (ROC) of less than 10 per cent in the past 12 months;
  • Declining ROC over the past 24 months;
  • Negative stock price change over the last 12 months;
  • Declining economic value-added (EVA) per share over the past 12 months.
  • Declining sales in the last 12 months.

 

What we found

There are four retailer stocks that meet our criteria in the North American markets. All are U.S.-based brick and mortar retailers: Children’s Place Inc., Bed Bath & Beyond Inc., Gap Inc. and Macy’s Inc. The Children’s Place operates as a children’s specialty apparel retailer with its network of speciality stores. Bed Bath & Beyond operates retail stores that sells domestics merchandise, including bed linens, bath items, kitchen textiles; and home furnishings products. The Gap operates outlets under the Old Navy, Gap, Banana Republic, and other brands. Macys operates department stores under the Macy’s and Bloomingdale’s names as well as a network specialty stores. The reality is that these four retailers are under pressure as online retailers continue gaining market shares.

Topping our list, ranked by dividend yield, is Macy’s. The stock is currently yielding 9.9 per cent. While providing an eye-popping payout, Macy’s is facing profitability challenges as measured by ROC and EVA measures. It is also experiencing declining sales. It will be hard for its board to keep paying this dividend to shareholders unless management succeed in turning around the economics of the business. Given how badly a stock price can react when shareholders are faced with a dividend cut, it’s better to avoid such stocks even if, at first sight, the yield looks attractive.

Investors are advised to do further research before investing in any of the companies shown here.

Ticker Name Price MarketCap Div Yield R/C R/C Ch. 24M Price Var. 12M EVA Ch. 12M Sales Ch. 12M
BBBY Bed Bath & Beyond $         14.58 $1.9B 4.60% -0.64% -11.22% -0.29% -831.39% -5.88%
PLCE Children’s Place $         72.26 $1.1B 3.10% 8.67% -3.59% -45.17% -26.25% -3.04%
GPS Gap, Inc $         16.61 $6.3B 5.84% 9.53% -1.26% -40.44% -101.16% -2.41%
M Macy’s Inc $         15.32 $4.8B 9.86% 6.16% -0.42% -55.79% -441.94% -1.02%

Christian Godin is a portfolio manager at Inovestor Asset Management.

Portfolio Manager’s December comment For November Results

The Canadian stock market realised another month of positive returns in November. This positive outcome unfolded as reported quarterly results were coming in line with investors expectations and in a context of diminishing international trade tensions.

The S&P/TSX Total Return Index rose by 3.6% in November and the S&P 500 also rose by 3.6% while the MSCI World produced a 0.9% positive return. At November end, the 12-months S&P/TSX Total Return Index gain was 15.7% nearly in line with the S&P500 gain of 16.1% and higher than the MSCI World 12-month increase of 11.8%.
The best TSX sector for the month of November was Information Technology up 8.6%, followed by Consumer Staples up 5.8%, and Consumer Discretionary up 5.5%. On the contrary, the worst performing sectors were Health Care (-2.8%), Real Estate (-1.0%) and Material down (0.1%).

Looking more specifically at INOC, the fund was up 5.4% and the best performers in November were Gildan Activewear (+16.4%) the t-shirt manufacturer, Parex Energy (10.1%) an oil producer with assets in Colombia, and Alimentation Couche-Tard. (+10.0%), the Canadian convenience store operator with a global footprint.
On the contrary, the weakest contributor to INOC was Norbord, which was down 4.1%, on after a strong showing in October. The negative contributors were Equitable down 4.1% and TD Bank down 1.8%. All the other constituents of INOC had a positive performance for the month of November.

Eleven industrial stocks that meet our criteria in the North American markets

What are we looking for?

High quality industrial names whose short-term operational returns continue to improve.

The screen

We screened the industrial sector of North American stock universe, focusing on the following criteria:

  • A market capitalization greater than $250-million;
  • A 12-month change in economic value-added (EVA) greater than 200 per cent – a positive figure shows us that the company’s profit is increasing at a faster and greater pace than the costs of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax (NOPAT) minus capital expenses;
  • A 24-month change in EVA greater than 200 per cent;
  • A five-year average return on capital (ROC) of more than 10 per cent. This is a profitability ratio that measures the returns expected for both debt and equity investors. By including such criteria, we are looking for companies with an excellent long-term track record.

For informational purposes, we have also included recent stock price, dividend yield and one-year return.

Log in to you account to get additional information or to modify the original screener

 

Portfolio Manager’s November Comment For October Results

The S&P/TSX Total Return Index declined by 0.9% in October, the S&P 500 rose by 2.2% and the MSCI ACWI ex. USA rose by 3.5%. At October end, the YTD S&P/TSX Total Return Index was up 18.1% which was lower than the S&P500 23.2% increase but higher than the MSCI ACWI ex. USA return of 16.0%.

The market made new highs in October as trade disputes concerns were dissipating and Q3 financial results were coming in line to better than expected. At month’s end, the US 10-year treasury yields were firming up in both the US and Canadian markets. The best TSX sector in October was Materials up 2.9%, followed by Industrials, up 1%. On the contrary, the worst performing sector was Health Care principally due to the poor performance of the Cannabis sector.

Looking more specifically at INOC, the best performers in October were Norbord (+19.7%), the Canadian manufacturer of wood-based products and leading producer of Oriented Strand Board. The next best performer was Equitable Group (+9.2%), %), a Canadian bank with the bulk of its business involved in the residential mortgages sector.

The NASDAQ Inovestor Canadian Equity Index YTD and Yearly returns stood at 20.2% and 14.7, ahead of the S&P TSX TR corresponding figures of 18.1% and 13.2%.

The Inovestor strategy was rebalanced in October. We increased exposure to the Industrials with the addition of Ritchie Bros Auctioneers Inc. (RBA) and Evertz (ET). We also added Parkland Fuel Corporation (PKI) as their results are strengthening now that their strategic acquisitions are being successfully integrated.

We exited Bell Canada (BCE), Canadian Imperial Bank of Commerce (CM) and Linamar Corp (LNR). These were the holdings with the weakest economic value added (EVA) figures in their respective economic sector.

Portfolio Manager’s September comment For August Results

The Canadian market has been the best performer in August due in part to a strong rally in previous metals (such as gold and silver) and a vigorous GDP of 3.6 versus 3.0 expected. On the other hand, the US GDP was weaker than expected at 2.0 versus 2.3. Global markets were also down as a result from fears of an economic slowdown: Brexit, Hong Kong unrests, inverted interest curve and tariff issues.

The S&P/TSX Total Return Index rose by 0.2% in August, the S&P 500 decreased by -1.8% and the MSCI World by -2.1%. At August end, the YTD S&P/TSX Total Return Index was up 17.1% which was higher than the S&P500 (16.7%) and higher than the MSCI World of 13.5%.

The best TSX sector in August was Information Technology up 7.7%, mainly due to the performance of Shopify, followed by Materials up 5.7%, with gold up 16.7% and silver up 15.4%. On the contrary, the worst performing sector was Health Care (-13%) principally due to the performance of the Cannabis sector.

Looking more specifically at INOC, the best performers in August were Metro Inc. (+9.43%), a Canadian food retailer in Quebec and Ontario, followed by Brookfield Infrastructure Partners (+8.21%), a publicly traded limited partnership involved in the acquisition and management of infrastructure assets globally. Both stocks rallied based on their defensive attributes and as of a result of the inversion of the yield curve.

On the contrary, the weakest contributor to INOC was Parex (PXT), which was down 9.62%, on weak energy prices. The other negative contributors were Linamar (LNR) and CCL Industries (CCL.B) due to disappointing results.