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Canadian Model Portfolio update: COVID-19

With the current COVID-19 spreading all over the global. Here is a quick portfolio update:

  • On February 20, S&P/TSX TR achieved new highs closing at $17,944. Since then the benchmark is down -20.29%. Whereas Inovestor Canadian model portfolio is down -17.44%
  • YTD the S&P/TSX is down -15.90% and Inovestor Canadian model portfolio is down -14.26%
  • The best performing stocks in our Canadian model portfolio since 20 February: Dollarama Inc -0.6%, Metro Inc -0.7% and Telus Corpotation -9.1%
  • The worst performing stocks in our Canadian model portfolio since 20 February: Parex Resources Inc -34.7%, Equitable Group Inc. -30.7% and Parkland Fuel Corp -28.6%
  • We remain focus on the long term and avoid current market noises. We believe our portfolio companies are fundamentally sound and should performed well on the long term

Opportunities might arise during bear markets

WHAT ARE WE LOOKING FOR?

From February 20, to March 5, 2020, the S&P 500 was down more than -15%, officially landing in the market correction territory. As the COVID-19 continues to spread in new territories, global supply chains are being disrupted, and companies are readjusting their forecasts. Mainland China is the most impacted with 111,363 confirmed cases and a death rate of 3.7% (as of 09/03/2020). Although we are facing a lot of uncertainty in the global economy and the financial markets, this might be a good opportunity for investors to buy stocks at a discounted price.

Today we will be looking at US fundamentally-sound stocks that are trading at a discount, giving the recent market correction.

THE SCREENER

  • market cap: $1B – we are only looking for large cap companies
  • Current SP Score: A minimum score of 50. The SP Score is a scoring system model, based on a 12-factor algorithm, which focuses on quality and value. The weights for quality and value are 75% and 25%, respectively.
  • Price 20-day Change (%): Stocks that are down at least –15% in the past 20 days. A 15% drop is considered a market correction
  • Increase in NOPAT over 24 months: at least 5% increase in NOPAT over the last 24 months. We are looking for companies that can increase the profitably of the business
  • Positive EVA: We are looking for companies with positive EVA only. Economic Value Added (EVA) is a measure of true economic profit created by a company. The higher Economic Value Added, the more value a company generates for its shareholders.
  • Increase in Sales over the last 24 months: At least a 7% increase in sales over the last 2 years. We are looking for company that can scale and grow the business
  • Dividend yield: At least a yield of 3%. This is an indicator that the company can distribute their profits with the shareholders

 

 

WHAT WE FOUND

We found 10 companies that were potentially affected by the market correction but appear to have strong fundamentals.

TICKER Company RECENT PRICE ($) MKT CAP ($MIL.) CURRENT SP SCORE NOPAT ($) NOPAT CHG. 24M (%) EVA ($) SALES CHG. 24M (%) DIV. YIELD (%) 20D PRICE RETURN(%) 1YR PRICE RTN.(%)
CSCO Cisco Systems, Inc. 39.68 168282.88 57 12558.94 5.70 2178.16 7.19 3.05 -18.80 -22.87
VNO Vornado Realty Trust 52.35 9998.10 56 3717.36 12.19 2109.23 156.51 3.97 -20.95 -20.40
CMA Comerica Incorporated 44.81 6367.30 70 1207.15 6.88 196.67 15.81 3.74 -26.94 -39.57
SNV Synovus Financial Corp. 25.58 3764.29 71 607.47 9.44 241.97 67.08 3.06 -30.05 -26.86
SHLX Shell Midstream Partners Lp 15.1 3522.67 56 602.33 8.54 453.59 7.00 8.36 -24.31 -4.31
MCY Mercury General Corporation 44.31 2452.91 55 320.09 7.14 214.03 13.53 5.16 -17.49 -18.24
EVR Evercore Inc Class A 61.67 2415.98 73 360.46 6.86 221.71 17.08 3.00 -23.93 -27.67
PAGP Plains Gp Holdings Lp Class 12.2 2222.09 63 2304.97 6.24 803.80 26.32 7.28 -24.03 -40.62
GEF-B Greif Class B 37.07 2197.23 53 483.68 6.44 291.95 29.21 3.71 -24.47 -11.99
CADE Cadence Bancorporation Class 12.06 1538.83 56 217.18 7.29 4.67 99.04 3.86 -25.88 -29.36

 

Cisco Systems is one of the global players in the Network and Cloud industry. They have been increasing their revenue year-over-year as well as their operating margins. One of the strategies put in place to boost revenues is to offer new products targeted to small businesses This could be a game changer, as we see the rise of small businesses in North America. Although the company beat Q2 earning, the stock dropped due to fears of COVIS-19, as 40% of their sales is outside the US. Given its potential, the stock price has been trading at the same price level as February 2018 – this might be a good buying opportunity.

Vornado Realty Trust is a real estate investment trust formed in Maryland, with its primary office in New York City. The company invests in office buildings and street retail in Manhattan. They have been constantly distribution a stable dividend yield of around 3.9%. The company has been increasing the net profit margin, ROE and ROA over the last 3 years. They are the largest owner of LEED-certified property in the US, with more than 27 million square feet of LEED-certified properties. With a solid balance sheet and a strong market presence in the US, Vornado might be trading at a discount given a rent drop of -21% last 20 days

 

For more details about Vornado Realty Trust and Cisco Systems, performance, readers can subscribe to the Investor for Advisor platform for free: https://www.inovestor.com/en-CA/store/

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.

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.

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.

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 Q3 Commentary

The S&P/TSX Composite Total Return Index increased by 2.5% in the third quarter. This adds to this years’ gains for a YTD return of 19.1%. During Q3, the S&P500 produced a 1.2% return for a YTD rate of 18.7% and the MSCI ACWI ex USA posted a 1.1% return leading to a 16.6% YTD total return.

Over the 3rd quarter, most company results were inline or better than expected. Interest sensitive sectors such as Utilities and REITS performed the best due to lower long-term interest rates.

In addition, the FED confirmed its dovish stance by reflecting the FED meeting minutes that were perceived to be accommodating. The FED had hinted that they would be open to reduce rates further if economic slowdown was visible. As a result, the Financials sector had the strongest sector rally in the month of September compared to the rest of the market.

NQICA in Q3 returned 3.9% leading to a YTD return of 21.1% versus the S&P/TSX composite which returned 2.5% in Q3 and 19.1% YTD. The one-year return for NQICA is 8.2% in comparison to the S&P/TSX which generated 7.1%.

The worst performers in the NQICA in Q3 were Stella Jones (SJ) with a return of -17.8%, due to the departure of the CEO, and CCL Industries (CCL.B) with a -16.52% return, due to poor quarterly results and increased insider selling. On the other hand, the best performers were Equitable Group (EQB) up 43.46%, due to excellent quarterly results and improvement in the Canadian real estate statistics, and Metro Inc. (MRU) up 19.11% based on great earnings and a positive update on the integration o the Jean-Coutu acquisition.

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.

Portfolio Manager’s August comment For July Results

The S&P/TSX Total Return Index rose by 0.34% in July, the S&P 500 by 1.44% and the MSCI ACWI ex. USA declined by 1.18%. At July end, the YTD S&P/TSX Total Return Index was up 16.62% which was lower than the S&P500 (20.24%) but higher than the MSCI ACWI ex. USA of 12.65%.

The market met new highs in July before retracing some of that gain as trade disputes dampened and long-term treasury rates fell to historical lows. At month’s end, the US 10-year treasury yield crossed the 2% mark to the low side.

The best TSX sector in July was Consumer Discretionary up 3.4%, followed by Information Technology, up 3.2%. On the contrary, the worst performing sector was Health Care principally due to the performance of the Cannabis sector.

Looking more specifically at INOC, the best performers in July were Equitable Group (+27.01%), a Canadian bank with the majority of its business involved in the residential mortgages with prime and non prime, who reported better than expected figures for Q2 results. The next best performer was Parex Resources Inc. (+7.38%), an oil producer with assets in Colombia, whose gains were due to the rally in oil prices last month.

On the other hand, the weakest contributor to INOC was Stella Jones (SJ), which was down 12.89%. News in regard to the departure of the company’s long-standing CEO caused the market to react negatively. The other negative contributors were Norbord (OSB) and Linamar (LNR).