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JMRD Market Observer for January 19th, 2018 – JMRD All-Cap Basket Q4 Updates & JMRD Diversified Income Growth Basket

In This Week’s JMRD Market Observer

 

 

  • JMRD All-Cap Basket & JMRD Diversified Income Growth Basket & 2017 Updates

  • Technology – Year Ahead 2018 – Despite the Run, There Are Opportunities

  • BoC reacts to strong data but remains preoccupied by NAFTA

  • Geopolitical Briefing: Trump 2018: What’s Next?

  • Retirement Corner

  • Week at a Glance

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports

 

 

JMRD Diversified Income & Growth Basket & JMRD All-Cap Basket Q2 Update

 

Before we get into Basket specifics, like last week, we wish to refresh you on how the various global indices and commodities performed in the quarter.  The Q4 and full-year 2017 data are provided in the table below.

 

 

Today we will discuss the two Canadian mandates which the Team manages; The JMRD All Cap Basket (ACB) and the JMRD Diversified Income and Growth Basket (DIG).

 

JMRD All Cap Basket (ACB):  2017 Update

 

The All Cap Basket (ACB) is a growth-oriented investment meant to be a complementary holding to the Diversified Income and Growth (DIG) Basket, which is discussed further below.  The ACB primarily invests in companies that are in the growth phase of their lifecycle.  The companies in question may, or may not, pay a dividend.  After posting a return of 7.25% in 2016, the ACB realized a return of 15.0% for 2017 vs the TSX Total Return of 9.1%. The All-Cap basket had a strong finish to the year with a return of 5.4% in Q4.  Since we launched this Basket in October 2013, the ACB has an annual compounded rate return of 14.1% versus the TSX Total Return of 8.90%. Additionally, the portfolio has exhibited a lower volatility than the TSX index, since inception.

 

Looking at the year as a whole, growth stocks led the charge and that was definitely on display in the ACB.  The most notable performer in the Basket in 2017 was Shopify (SHOP), the provider of on-line retail services for small businesses looking to grow their presence on the Internet.  SHOP posted a return of 120% for the year after the company reported its first quarter of positive earnings (their most recent quarter) and after its subscriber base grew at a record pace.  The company was the subject of ‘short seller’s report’ whose author was looking to profit from a drop in the share price.  The report questioned SHOP’s operating model, specifically how it related to its marketing strategy and despite the stock taking a hit immediately after the report hit the wire, it has recovered most of the lost ground.

 

Savaria Inc, the manufacturer and distributor of mobility products was next in line, up 71% in 2017, after making a few successful acquisitions in the US, China and Australia.  The aging global population should continue to act as a tail-wind for this company, which makes such things as elevators and chairlifts.  Premium Brands (PBH) was another solid performer positing a return of 52%.  The company continues to excel at its ‘growth-by-acquisition’ strategy and continues to add new food service offerings to its fold.  New Flyer industries (NFI) moved higher once again after a good year in 2016.  In 2017, the stock experienced some turbulence in the last quarter of the year but this bus manufacturer proved resilient and the stock finished up 35% or 2017.  Despite being listed on the TSX, NFI’s main manufacturing facilities are located in the US and the company stands to benefit from the Trump’s newly implemented corporate tax regime.  Boyd Group, the operator of auto-collision repair centres, whose business is primarily US-based, should also benefit from lower US corporate taxes.  Boyd is also an ACB component and it was up 18% last year.

 

The laggards last year were Parkland Fuel Corp. (PKI) and Innergex Renewable (INE).  Parkland has spent the past few quarters digesting two large acquisitions in the wholesale and retail markets. Investors have taken a bit of a ‘wait and see’ approach to the deals, but with the shares up 10% over the last 5 weeks, have started to warm up to the shares. Innergex is a renewable power producer and a higher-yielding equity that trailed most growth stocks in 2017 mainly due to the adverse impact of rising interest rates on higher dividend-yielding equities. In addition, the company made an acquisition in November, buying Alterra Power. We have since sold the position in the Basket in favour of Boralex (BLX), another renewable power producer but one whose growth prospects we favour more.

 

It was a busy final quarter for ACB changes.  We sold out of positions in Sleep Country (ZZZ) after a second negative earnings quarter. We also sold Crius Energy Trust (KWH.UN – the seller of electricity and natural gas to residential and commercial customers) and ZCL Composites (ZCL – the maker of underground storage tanks) for the same reason.  Lastly we sold CGI Group (an IT business processing services company) as it lost its momentum and we felt there were better opportunities elsewhere.  We initiated positions in Jamieson Wellness (JWEL) the newly listed public company who manufactures and distributes vitamins and supplements; we invested in BRP Inc.(DOO – formerly known as Bombardier Recreational Products) because of the high consumer confidence and spending in Canada and the US; we bought Whitecap Energy shares because of a sell-off in its shares after what we felt was a good acquisition; and lastly we initiated a position in Spinmaster (TOY), the Canadian toy manufacturer, just before the holiday season.

 

Below are the current All Cap Basket holdings.

 

 

As mentioned above, The All Cap Basket is more of a growth-oriented investment to complement the DIG Basket.  The minimum purchase for the All Cap Basket is four Baskets or $72,000 at current prices, with subsequent purchases of 1.5 Baskets, or about $24,000. And again, this amount will continuously change as the prices of it constituents change on a daily basis.

 

JMRD Diversified Income & Growth (DIG) Basket: 2017 Update

 

For the year, the DIG Basket’s return was 9.74% compared to the TSX Total Return benchmark of 9.1%.  The leader in 2017 was Dollarama, with a return of 60%.  Same store sales growth seems to track consistently higher each quarter and it’s definitely become   one of Canada’s best business success stories in the retail space.  It can be argued that it’s also “Amazon-proof” as most online retail spending is typically directed toward higher priced items. WSP Global was the runner up with a gain of 38% in 2017.  This infrastructure company has grown by way of accretive acquisitions over the years and has become a very reputable global engineering and design fim.  Algonquin Power, a clean-energy power producer, was up 29% in 2017, posting one the best returns within its sector.  After closing its transformational acquisition of Empire District and Electric in 2017, the company has billions of dollars’ worth of development opportunities and is promising a 10% dividend growth rate between now and 2021.

 

The laggards last year were Keyera Corp, a midstream company whose volumes were adversely affected by the low natural gas prices currently plaguing western Canada and SNC Lavalin, whose stock price remained flat for most of the year as the market still awaits a catalyst to take it to the next level.

 

In Q4, we took partial profits in Dollarama and TD Bank to lower their higher weightings in DIG and we also sold Northland Power (NPI) after the company announced the end of its strategic review. We also switched TransCanada Pipelines (TRP) to Enbridge (ENB) due to the fact that their stock prices diverged for most of the year and we felt that ENB offered more upside at the time.  The 4th quarter also saw our Veresen shares convert to Pembina Pipeline (PPL) shares after the closing of the takeover and we also added to our position in PPL in November.  We topped up Algonquin Power when the stock fell to the low $13s after an equity financing pushed the price lower.  We also added to Capital Power due to its high dividend-yield of 7% and its commitment to a 7% dividend growth rate for the next few years.

 

Below is a snapshot of the current holdings.  The current annual cash flow is $483 for a yield of 2.98%.

 

 

We consider the DIG Basket a top pick for clients seeking income and growth and feel it is very appropriate for a portion of a client’s equity weighting.  The current value of one DIG Basket is approximately $17,600 making the minimum initial position approximately $35,200, which is two Baskets.  This amount will continuously change as the prices of the DIG Basket components fluctuate on a daily basis.  Subsequent purchases can be made in one Basket increments. One important note in reviewing “past performance” and portfolios was a note from Raymond James morning commentary that pointed out that investors who were frustrated about “underperformance” last year often resulted from “doing exactly what they’re supposed to be doing – diversifying and thinking about the potential downside even when there isn’t any. Years like 2017 are anomalies; diversification is for the long-term and may be frustrating during the rare occasions when the stock market goes straight up. Just remember that once the switch is flipped and stocks do undergo a correction, you’ll probably be happy you’re not 100% invested in the stock market.” As we often discuss, a portfolio should match one’s risk objectives and investment goals and not what the market is doing in any one period.

 

 

Technology – Year Ahead 2018 – Despite the Run, There Are Opportunities

 

Candidly, while we continue to be excited for the opportunities in technology as a whole, we wouldn’t be honest if we didn’t share some frustration with respect to the Canadian universe of names. No doubt, that frustration continues to be caused by the lack of names which is underscored by a 3% index weighting for technology on the TSX when the same segment represents 23% of the S&P 500. At the same time, we’re also somewhat frustrated by the lack of organic growth names that comprises the TSX Information Technology Sub-Index. The reality is that many long standing names have taken a back seat to organic growth names. In the US, they’ve been represented by the “FANG” stocks. In Canada, with the exception of names like Shopify and Kinaxis in recent years, those long standing names have been relegated to the sidelines by other growth sub-segments of Cannabis and anything related to blockchain.

 

If the above weren’t enough – when we look to the disruptive / transformational themes going forward like Artificial Intelligence / Machine Learning, Augment / Virtual Reality, IoT, and Big Data we believe many of the  leaders with arguably outsized value driving opportunities are private companies. The harsh reality is that many of the public Canadian tech names are on the mature end of the innovation cycle. While the positive is that many of those Canadian public names have “crossed the chasm” when it comes to becoming mainstream, the action when it comes to the stock price performance tends to be the most significant in the earlier phases (see Exhibit 1) of growth.

 

See the full article

 

 

BoC reacts to strong data but remains preoccupied by NAFTA

 

A dovish interest rate hike from the Bank of Canada was always in the cards. The central bank, which previously said its actions are data-dependent, was forced to adjust its stance amidst strong data. But it tried to pare back expectations of additional rate hikes via cautionary language including concerns about NAFTA-related risks and uncertainty about inflation. The dovish spin was reinforced by the BoC saying that even though the output gap is closed, it still thinks “continued monetary policy accommodation will likely be needed to keep the economy operating close to potential”. Based on that statement, we expect a pause until late May, which will give the BoC some time to assess the impacts on the economy of slightly tighter policy, B20 regulations and NAFTA-related developments. But given our own outlook i.e. 2.5% for Canadian GDP growth in 2018, we continue to call for three additional rate hikes this year. We anticipate a stronger economy this year than what the central bank is calling, in part because of provincial fiscal stimulus (expected to be announced during budget season), the latter not fully accounted for in the BoC’s projections.

 

See the full article

 

 

Geopolitical Briefing: Trump 2018: What’s Next?

 

After a turbulent first year dogged by investigations, staff turmoil and low approval ratings, President Trump is heading into 2018 with some momentum. He has managed to pass significant tax cuts, nominate many conservative judges, and reduce regulations, which has been particularly lauded by small-to-medium sized businesses. All of this, his supporters claim, has helped to strengthen the economic recovery and drive stock market valuations to record levels. While Trump will look to build upon this momentum in 2018, he also faces many challenges that risk derailing parts of his agenda.

 

See the full article

 

 

Retirement Corner

 

 

 

 

Reads of the Week

 

 

 

 

 

 

 

Economic Reports

 

Monday January 22nd – Canada Wholesale Sales

Tuesday January 23rdNone

Wednesday January 24th – None

Thursday January 25th – Canada Retail Sales, U.S. Jobless Claims, U.S. New Home Sales

Friday January 26th – Canada Inflation Rate, U.S. Durable Goods Orders, U.S. GDP

 

 

Earnings Reports

 

Monday January 22nd – Netflix

Tuesday January 23rdCanadian National Railway

Wednesday January 24th – General Electric

Thursday January 25th – Rogers Communications

Friday January 26th – Honeywell

 

 

Have a good weekend!

 

By | 2018-01-19T22:16:00+00:00 January 19th, 2018|JMRD Updates|0 Comments

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