Michael Sprung is president of Sprung Investment Management. His focus is Canadian large caps.
Alaris Royalty (AD.TO)
Last purchased August 26, 2015 at $26.08
Alaris Royalty is a unique investment firm that invests in a diversified range of private companies with solid long term histories and stable management teams. The nature of the investment allows Alaris to participate in future growth while the entrepreneurs maintain control provided certain agreed-upon benchmarks are met. Management has had a successful track record of identifying good investment opportunities.
Since first recommending this company in June, the performance has been disappointing due to some operational problems at several of their investments, one of which resulted in a write-down. These issues now appear to be largely in the rear-view mirror, and Alaris has an expanding pipeline of deal flow with an expanded credit facility. We anticipate that profitability will increase as activities get back on track and dividend increases will follow.
Suncor Energy (SU.TO)
Last purchase December 21,2015 at $35.00
Suncor is Canada's largest integrated oil and gas company. It has a strong production base with quality long-term assets, a strong balance sheet, and an integrated business model smoothing, to some extent, the cash flow from the various business segments.
The recent pressure on energy prices has caused energy-related stocks to pull back significantly. Suncor has the financial strength and diversified base of operations to do well in this environment, as evidenced by its opportunistic bid for Canadian Oil Sands. The dividend currently produces a 3.4-per-cent yield.
Stuart Olson (SOX.TO)
Last purchase October 5, 2015 at $5.49
Stuart Olson, formerly The Churchill Corporation, is one of Canada's largest construction firms providing general contracting and electrical building systems contracting in the institutional and commercial construction markets, as well as electrical, mechanical and specialty services in the industrial construction markets. The stock has underperformed the market and its peers as investors have focused on its exposure to Western Canada. Going forward, there are plans by the governments of Alberta, Saskatchewan and B.C., as well as the federal government, to dramatically increase spending on infrastructure.
Stuart Olson's Buildings Group has a $1.4-billion backlog and is well situated to get a share of the spending on social infrastructure. The Industrial Services Group, while exposed to the oil sands, derives its revenue from maintenance, repair and operations in the energy, mining and hydro industries. The company has a good balance sheet, and the dividend currently yields 9.0%.
Past Picks: January 7, 2015
Manulife Financial (MFC.TO)
Then: $21.26 Now: $18.86 -11.29% Total return: -8.60%
Canadian Natural Resources (CNQ.TO)
Then: $32.18 Now: $27.53 -14.45% Total return: -11.95%
New Flyer Industries (NFI.TO)
Then: $13.16 Now: $28.15 +113.91% Total return: +121.73%
Total Return Average: +33.73%
2015 was a tough year to be an investor, particularly if you were in a country where the economy and stock markets were exposed to energy and other commodities that suffered sharp price declines resulting from oversupply and slowing demand. Geopolitical instability weighed on investors' as tensions in the Middle East escalated, causing mass migration that elevated discord in the European Union that was already present from the debt crises in several member countries . In addition, investors waited with trepidation for the Federal Reserve in the U.S. to hike interest rates despite high debt levels, slowing global economic activity and an already highly valued U.S. dollar. As a result, investors are extremely wary of the economic environment that we enter into at the start of 2016.
While there is much to be concerned about, there are some potentially positive undercurrents that are running throughout the global economy. Within the energy and metal markets, producers have cut back capital expenditures to a significant degree. Consolidation is beginning to occur within these industries, along with increasing asset dispositions at distressed prices. The oversupply stemming from Saudi Arabia will test the fortitude of the authorities as taxes are increased to cover large budgetary deficits that will serve to cause displeasure in the general population. These actions will serve to re-balance the supply/demand issues in the energy industry. Lower capital expenditures in both metals and energy will defer future production.
The strong U.S. dollar will put pressure on the profitability of U.S. companies doing business abroad. Furthermore, margins will come under pressure as wage demands increase while low inflation diminishes the ability to increase prices, especially with the growing substitution from countries with weaker currencies. Shareholders are likely to demand that more capital be deployed in research and development to regain longer-term competitive advantage.
In Canada, investors are concerned that new provincial and federal governments are advancing tax-and-spend policies. At least at the federal level, we enter into this period in a strong fiscal position. In the interim, Canadian industry should benefit from the low value of the Canadian dollar to the extent that they export products and services.
We have witnessed a correction in many sectors of the Canadian market. Those companies with the financial and managerial wherewithal will take advantage of current conditions and prosper.