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Stock Opinions by Andy Nasr

N/A

Economy. Things are good, and we should be grateful. However, it’s really important to be diversified. Usually when things are this good, they’re not this good for long. The best way to mitigate risk is by being diversified by asset class, geography, and making sure you own the right securities. That is probably going to be the key theme going into 2018 and beyond as we approach the end of the business cycle and start to see more credit build up, not just in the Canadian economy, but economies all over the world. Inflation interest rates are going remain anchored by several structural factors. First and foremost, there is a ton of debt floating around. When you have that much debt in the global economy, rates can only go up so much before it starts causing economic conditions to start deteriorating.

Unknown
DON'T BUY

A little concerned about the progress management is going to be able to make as they prune the portfolio trying to right size it. After years of growing by acquisition, focusing on energy and relying on GE Financial, he worries at a stock trading at this price and supposed to generate $1 in earnings. They’ve cut the dividend. There’s a lot of work to be done. It looks like the end markets are struggling. It’s probably going to take several quarters before the turnaround starts to work out. You really want to see organic growth before you get excited. There are better risks/rewards in other industrials.

electrical / electronic
COMMENT

His outlook for 2018 is that oil and gas prices are going to remain range bound. Would prefer energy infrastructure instead of this company. He wants exposure to companies that are going to benefit from pulling the stuff out of the ground. That includes transporting it, fractionation for gas, logistics. Companies underpinned by “fee for service” or “take or pay” contracts have a lot more visibility and a lot less commodity price exposure. This wouldn’t be his favourite.

oil / gas
BUY

Feels you can’t go wrong with this. It is invested in strip centres, not shopping malls. Typically, anchor tenants are grocery stores, banks, etc. which cater to peoples’ every day needs. It is quite sizable and has a decent balance sheet. The concern with REITs is strictly sentiment, as they are considered interest rate sensitive. With this one, he sees a pretty well capitalized company. They have some debt, but are reinvesting in the business. They are looking at redeploying the capital into some development or intensification project which should ultimately cause the net asset value to increase. Dividend yield of 5.6%.

property mngmnt / investment
COMMENT

Not a big fan of retailers in general, and this isn’t a good entry point. A better choice would be CT Real Estate Investment Trust (CRT.UN-T), a nominal bond proxy, but you get a decent yield. Canadian Tire is their tenant.

specialty stores
BUY

Exceptionally well diversified. He likes management teams who have a history of allocating capital well, good returns on invested capital and a good track record. This company is really the personification of all of that.

insurance
BUY on WEAKNESS

He would buy this when it is down. An energy infrastructure company, but doesn’t get credit that a lot of its operating profit is not particularly commodity sensitive. Has great renewable energy contracts, 20-25 years duration, indexed to inflation. On top of that, there is a US acquisition they will be completing next year, which reduces their commodity price exposure even further. Hopefully that causes the stock to get re-rated. Dividend yield of 7.6%.

oil / gas
BUY

Trades at a decent valuation. Only about 35% of travel bookings are done online. People still use travel agents. This is a great emerging market story, because as per capital income rises in emerging markets, you are going to see travel spending increasing significantly.

department stores
PAST TOP PICK

(A Top Pick Nov 23/16. Up 33%.) Involved in a couple of oligopolies, online search, online video and ad spending, and has a ton of cash they can deploy into areas that are going to grow hand over fist in the next decade. It isn’t trading at all that much of a premium to the S&P 500 in the context of its growth rate.

Business Services
PAST TOP PICK

(A Top Pick Nov 23/16. 0%.) A lot of concerns that surround this company are reflected in the valuation. They are in line with where it has been historically. Has a lot of operational room to offset some of the headwinds.

food stores
PAST TOP PICK

(A Top Pick Nov 23/16. Down 35%.) This is dirt cheap, trading at about 10X earnings. Reduced their guidance because there were some inventory issues at Office Depot and Toys “R” Us. Very well diversified. They’ve merged with Jardin, and going forward are going to be able to get a lot of synergies that ultimately support the earnings growth. Valuation is so compelling that it is tough to make an argument not to pick some up. Dividend yield of 3%.

misc consumer products
SELL

Sell and buy Enbridge (ENB-T)? You are on the right track. He would get rid of this and buy Enbridge. With energy infrastructure, you are getting very predictable cash flows. It is tough not to like Enbridge considering that it accounts for about two thirds of the oil that crosses over the Canadian and US border. Also has a backlog of over $25 billion that they should be able to execute pretty seamlessly. That translates into mid-single digits/high single digits cash flow growth.

oil / gas
HOLD

He continues to like this. The demand/supply fundamentals are great. CHMC just released an apartment survey and their outlook for vacancies in major metropolitan city centres are absurdly low in Toronto, Montréal and Ottawa. This one tends to be focused in eastern Canada, and are definitely going to benefit from that low vacancy rate. Also, management spent a ton of money in the last 10 years reinvesting in their properties, allowing them to charge a little more for rent.

investment companies / funds
HOLD

Prefers US banks over Canadian banks, as he expects there will be a little more loan growth, especially if you consider that US households have a lot less than Canadian households. This bank has had a fantastic run. It is amongst the large cap banks, so has the most exposure to rising US interest rates.

banks
BUY on WEAKNESS

This bank gives you a huge deposit base in the US. They have an under leveraged deposit base, so they can issue a lot more loans. However, there are still household debt concerns. This would show up through slower loan growth, which probably weighs on earnings growth. He would try to get this on a pullback. Dividend yield of 3.2%.

banks
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