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bnn market call

Paul Gardner is partner and portfolio manager at Avenue Investment Management His focus is fixed income, large cap dividend-paying stocks and REITs.

Top Picks:

Mainstreet Equity (MEQ-T)

Mainstreet Equity is one of the cheapest stocks on the TSX. It trades at a 25-per-cent discount to its NAV. Although there will be weakening in the Alberta economy, there should be very little impact to the mid-level rental markets due to a tight rental market. The balance sheet is liquid and future acquisitions should occur. Net operating income is growing around 15 per cent, and the company is well-positioned owning properties near the new Rexall Centre in Edmonton.

Yellow Pages convertible debenture 8% 2022

The convertibles offer investors a unique chance to own a relatively secure bond that gives not only high yield, but also optionality to the equity price. Yellow Pages now has more than 50 per cent of revenue coming from its digital platform. The print business is now "stabilized" at 22 per cent decline rates annually. The company still has high free cash flow (FCF). It uses its FCF to pay back the senior bonds outstanding which will make the convertibles, in a few years, the only bonds left of the company's debt. The bonds trade on the TSX and an investor must be careful on how much to pay for the bond due to its wide bid/offer spreads.

Sirius XM Canada (XSR-T)

Its recent share price weakness does not justify its stable and growing business. The dividend yield is over 7 per cent while the company generates considerable free cash flow. The company will benefit from its recent push into the used car market. Sirius U.S. increased its guidance on subscribers, which should benefit Sirius XM Canada in the medium term as Canada lags by two years. On a EV/EBITDA basis, the Canadian version is too cheap relative to its U.S. cousin.

Past Picks: May 5, 2014

Bank of America (BAC-N)

Then: $15.08; Now: $16.74 +11.01%; Total return: +12.10%

Timbercreek Mortgage Investment (TMC-T)

Then: $9.24; Now: $8.19 -11.36%; Total return: -3.53%

Sirius XM Canada (XSR-T)

Then: $7.83; Now: $5.48 -30.01%; Total return: -19.03%

Total return average: -3.49%

Market outlook:

The Canadian markets will have to embrace volatility in bond yields and oil prices in the interim. Besides these ancillary issues, the stock market should perform well due to sustainable corporate profitability, relatively low interest rates and low labour wage pressures. The North American economy should grow more than 3 per cent, catching up from a very harsh winter for the continent. The lower Canadian dollar should help profitability for Canadian companies in the upcoming quarters. The Canadian stock indexes should outperform the U.S. indexes after three years of underperformance. Valuations for both TSX and S&P are in the middle range. The near-term risk is a "melt up" surprise, and not a "melt down."