Michael Sprung, president, Sprung Investment Management

FOCUS: Canadian large-cap stocks 

MARKET OUTLOOK:

Markets continue to be volatile as investors react to forces impacting the economic outlook. The war in Ukraine drags on, prolonging shortages in energy and other commodities including food. Europeans are facing a very tough winter as they are now acutely aware of the folly of creating such a great dependence on Russian exports. Global supply chains are shifting as the pandemic, and now the war, have highlighted the strategic fault lines in their design. Restructuring supply routes and manufacturing will take many years to develop.

Supply shortages have led to inflationary pressures that have not been seen in many years. Central banks have reacted by attempting to stem demand by rapidly increasing interest rates. As rates rise, fears of slowing economies leading to a recession are developing. The massive accumulation of government, commercial and personal debt over the past few years will not be easily serviced in an environment of higher interest rates, constraining the abilities of debtors to respond to these challenging conditions. While markets have already receded, there is the possibility of further downside. Investors with medium to longer-term investment horizons will be drawn to companies with strong underlying fundamentals and management.

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TOP PICKS:

Royal Bank of Canada (RY TSX)

Last Purchase: October 27, 2022 $125.00

The Royal Bank is Canada's largest bank by market capitalization with dominant domestic banking, insurance, wealth operations and global capital markets businesses. It is a G-SIB universal bank with a scale that is advantageous in mass-market banking. Management is intent on maintaining its lead and improving market share by investing heavily in technology and its distribution network. Investment is also being directed toward retail growth in the United States. As these investments payoff, the bank should benefit from positive operating leverage leading to greater profitability and future dividend increases. The bank has paid a dividend every year since 1870. At current levels, the stock yields 4.1 per cent.

Suncor Energy (SU TSX)

Last Purchase: October 27, 2022 $45.52

Suncor is Canada's largest oil and gas company with upstream operations focused on the Alberta oil sands and offshore operations on Canada's east coast. The company's downstream business operates four refineries in the U.S. and Canada. Management has raised capital recently through the sale of wind and solar assets to Canadian Utilities for $730 million and the disposition of assets in Norway for $410 million. It is believed that assets in the U.K. may also be sold. A strategic review of the company's retail operations is also underway.

Suncor has recently announced the acquisition of Teck Resource's interest in the Fort Hills oil sands project for one billion dollars. This purchase will increase Suncor's interest in the project from 54.1 per cent to 75.4 per cent. The remaining 24.6 per cent is currently owned by TotalEnergies EP Canada Ltd. Over time, management estimates that greater control will allow better optimization of the Fort Hills operations. At current levels, the stock is attractively priced and yields 4.1 per cent.

Fortis (FTS TSX)

Last Purchase: March 2020 $48.73

Fortis is a diversified infrastructure holding company primarily involved in gas distribution and electric utilities in the U.S. and Canada. Over the next five years the company intends to invest over $22 billion which will increase the low-risk rate base by around 6.2 per cent per annum. Almost all of these capital expenditures will be spent on regulated investments, 83 per cent of which will be on smaller projects. Management anticipates that the bulk of these projects will be financed from operations and the remainder through debt and dividend reinvestment. This investment should support dividend increases of between four per cent and six per cent per year. The current yield is 4.3 per cent.