Skip to main content

The Canadian stock market isn't the easiest territory to navigate these days: Commodity producers are struggling with uncertainty over the health of the Chinese economy, while banks are flirting with record highs but face indebted consumers and a sputtering housing market.

For some guidance on what to do, we caught up with the lead managers of the Franklin Bissett Canadian Equity Fund, Garey Aitken and Tim Caulfield, last week. Under their leadership (Mr. Aitken is also chief investment officer of Franklin Bissett Investment Management), the fund has beaten its category average and the S&P/TSX composite index for the past five calendar years – giving their views some importance.

And what's their view now? They see a lot of opportunity for Canadian stocks, but prefer several names that may surprise you.

Story continues below advertisement

Financials
While some investors, including U.S. hedge funds, are either avoiding Canadian banks or short-selling them, Mr. Aitken and Mr. Caulfield have been active buyers this year. Like anyone, they can see Canadian consumer debt levels and the state of the country's real estate market, but are "less fussed about those things," as Mr. Aitken puts it.

"The nature of consumer debt is different in Canada than the United States," he said. "Our real estate market is completely different, and that's where we strongly disagree when people draw parallels between the Canadian real estate market in 2013 and the U.S. market in 2007 and 2008."

For example, mortgage insurance is different and mortgage interest isn't deductible in Canada, leaving the banks looking like solid franchises with attractive dividends. A slowdown in lending growth is already priced into stocks. And if growth is limited, banks will crank up their dividend payout ratios.

Curiously, their fund's top holding is the smallest (based on market capitalization) of the Big Five banks: Canadian Imperial Bank of Commerce. They applaud management for lowering the bank's risk profile and raising its focus on domestic operations. Yet, in terms of valuation, it continues to trade at a discount to other banks.

Materials
These stocks have been the biggest drag on the S&P/TSX composite index over the past two years, with gold and fertilizer producers in particular, driving down returns. The fund managers have been avoiding the sector, leading to a considerable "underweight" position in the fund – but their exposure to materials stocks is now on the rise.

Nope, they're not betting on beaten-up big-name gold producers, but rather five positions in: Agrium Inc., Potash Corp. of Saskatchewan Inc., Major Drilling Group International Inc., Silver Wheaton Corp. and Franco-Nevada Corp.

"They've all seen periods of weakness, and at times periods of extreme weakness, over the past 12 months or so – and we think that has been an opportunity," Mr. Aitken said.

Story continues below advertisement

"When people look at our fund and see us underweight materials for a long period of time, they are sometimes surprised to see us getting as aggressive as we have been."

Still, at the end of July their materials weighting was just 8.3 per cent, versus more than 13 per cent for the S&P/TSX composite index.

Energy
This area of the market has trended sideways for some time, buffeted by rising production costs and a move toward U.S.-energy independence. The fund managers aren't shying away, though, with close to a market-weight position.

The difference? They prefer smaller, service-oriented energy stocks over larger, integrated producers. In other words, Suncor Energy Inc. has a relatively small position in the fund, despite being one of the biggest companies in the index.

"What's interesting about the Canadian energy market place is the depth and breadth – the number of companies we have in capital markets that are associated with energy," he said.

It's tremendously deep – but the trick is to get past the usual suspects. Among their favourites: Tourmaline Oil Corp. and Savanna Energy Services Corp.

Story continues below advertisement

Tourmaline is crude oil and natural gas exploration and production company that the managers like for its management team and strong growth in production and reserves. Savanna is a drilling and well-service provider that should see ongoing improvements in operating and financial performance.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies