The so-called "Trump bump" has made U.S. stocks more expensive and investors may wish to take a closer look at Canadian names that offer better value, says Stephen Carlin, managing director and head of equities at CIBC Asset Management. Mr. Carlin sees the big Canadian banks as a good value right now, as well as energy companies that can sustain themselves through the continuing downturn in oil prices. The Globe recently spoke with Mr. Carlin about what companies he has been buying and selling, and the Canadian-based technology company he wishes he bought sooner.
What's your current outlook on the markets?
The election of [U.S. President Donald] Trump created a bit of a springboard for optimism; whether it be economic growth or potential profit growth, especially in the U.S. We've got the Trump bump. Stocks have performed very strong since then, but I would argue that stocks have performed well on an improving economic outlook. Also, companies continue to deliver attractive earnings growth.
We've seen a bit of a divergence between stock market returns in the U.S. and Canada. Canada has lagged somewhat, partly because of the sensitivity around higher exposure to the deeper cyclical industries like energy and materials. We've seen a notable increase in the price-earnings multiple that investors are paying for growth in the United States relative Canada. We think that the Canadian marketplace looks more attractive from a valuation perspective, and the U.S. looks a little bit more toppy.
What are your thoughts around concerns of a potential market correction?
What causes a correction is overexuberance. What causes a correction is a change in the view on volatility. Some of those risks are not apparent today. We don't see those risks and, as a result of that, we don't feel uncomfortable. That said, markets don't go up in a straight line. We really anchor our views on the investments in the businesses that we're investing in. That's where we spend most of our time – looking at the fundamentals of the businesses we're investing in.
What stocks have you been buying lately?
When we look at the Canadian marketplace, we obviously have to have views on various commodities. Our view in energy is that oil prices are trapped between a fairly tight range of between $45 to $55 (U.S.) per barrel. Our discipline behind owning businesses in the energy space says that, when prices are at the lower end of the range, we're adding to energy stocks, and when they get to the higher end of the range, we're taking money off the table. We're focused on low-cost operators that can sustain their business models in a $50 or sub-$50 environment. For example, Canadian Natural Resources is a name we like and have added to recently.
With economic growth picking up, we're seeing more infrastructure spending from governments globally. We've increased our exposure in the engineering and construction space, which we think represents a very good value and good upside potential. SNC-Lavalin is a name we've added recently.
In the financial-services sector, there has been heightened level of attention paid to housing and mortgage exposure and Canadian banks have underperformed the market on a year-to-date basis. We took money off the table because we felt the banking sector was looking a little expensive, but now we feel the banks represent a very attractive value where they are trading today. There was nothing [in the recent earnings] that would suggest to us that we have risks on the housing front and in fact credit has been performing better than expectations. We own Royal Bank, TD Bank, CIBC and Bank of Nova Scotia. Home Capital is also a name we own and have spoken publicly about. I think we've said enough about that. [CIBC Asset Management boosted its position in Home Capital to 9.69 million shares as of April 30, or 15 per cent of the company, up from 2.46 million at the end of the first quarter, according to Bloomberg].
What stocks have you sold?
We've been taking profits in the consumer discretionary sector. It's largely anchored around valuation and a view on total return prospects. We've done very well with names like Dollarama, which continues to perform well, but our discipline will force us to ask questions on the relative upside potential. We still own it.
In industrials, we've been trimming ever so carefully our position in Waste Connections, which bought Progressive Waste Solutions. It has been a very strong performer for us.
What stock do you wish you bought?
Shopify. We do have exposure now, but were a little bit late to the story. We've owned it since late 2016. We've made some handsome profits for investors since then. Clearly, had we been in it a bit earlier that would've been even better. We've done very well with that investment. We continue to like it.