James Telfser, partner and portfolio manager at Aventine Investment Counsel

FOCUS: North American stocks

MARKET OUTLOOK:

This has been a challenging year for investors with very few places to hide from the cross-asset carnage. In speaking with clients, one of the best pieces of advice we offer is to simply step back and review your time horizon. This is not the time to panic and could in fact be a very interesting point in time to begin allocating to equities. We will never be perfect on the timing, but when you buy high-quality companies with solid balance sheets and a competitive moat, while also trading at multi-year lows on valuation, you will be rewarded in the long-term. It is useful to remember that while investing in stocks is risky in the short term, it is far riskier to not be invested in the long-term.

Make no mistake we believe we are likely to remain in a period of heightened volatility for some time as risk assets around the world recalibrate to higher interest rates and as we assess the damage from the dramatic recent tightening of financial conditions. As a result, we continue to recommend a higher-than-average cash weighting while also increasing traditional fixed income allocations as the current volatility has created some very attractive yield-based opportunities.  

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TOP PICKS:

Intact Financial (IFC TSX)

Intact has been a consistent performer for many years as it has executed on its strategy to become the largest P&C insurer in Canada while also positioning itself for above-average growth in the U.K. and Ireland, as well as in the United States. Intact has a conservative management team, a strong balance sheet and operates in a predictable industry; a solid combination in volatile markets. Intact rarely trades at a below-peer valuation, but shareholders consistently get rewarded with mid-to-high teens return on equity and catalyst potential in the form of mergers and acquisitions. 

Brookfield Infrastructure (BIP NYSE)

The management team at Brookfield Infrastructure Partners (BIP) is some of the best capital allocators that we have come across. The portfolio of assets at BIP is built for the type of macro environment we are currently in, given that many of the risks in the market revolve around inflation, volatility in commodity prices and supply chain bottlenecks. To hedge against inflation, 70 per cent of BIP’s revenues are indexed to local inflation. In response to commodity prices, the company purchased several midstream oil and gas assets in the U.S. in 2018, and while 80 per cent of these assets are price agnostic, 20 per cent are market sensitive. Finally, logistics infrastructure worldwide is under stress which puts a spotlight on its essential nature. When demand for infrastructure is high, BIP realizes higher tariffs and customers compete for whatever space and storage is available. The company is consistently growing FFO, pays a significant and growing dividend (~3.9 per cent yield) and trades at a sizeable discount to historical multiples.

Fortis (FTS TSX)

Fortis is our go-to utility given its strong long-term outlook, stable dividend growth and high-quality business mix. September was an extremely weak month for the utility index with the group declining approximately 10 per cent. We believe the consistent dividend growth (49 consecutive years of raising the dividend), as well as project optionality, provide a great backdrop during a period of heightened market volatility. Predictability of earnings will be rewarded in the coming quarters as we continue to see negative estimate revisions pressure the more cyclical sectors.

PAST PICKS: November 12, 2021

Park Lawn (PLC TSX)

• Then: $39.98
• Now: $23.68
• Return: -41%
• Total Return: -40%

Linamar (LNR TSX)

• Then: $76.50
• Now: $57.12
• Return: -25%
• Total Return: -24%

 Enghouse Systems (ENGH TSX)

• Then: $55.80
• Now: $28.86
• Return: -48%
• Total Return: -47%

Total Return Average: -37%