Paul Gardner, partner and portfolio manager, Avenue Investment Management

FOCUS: REITS, bonds, and dividend stocks

MARKET OUTLOOK:

The tale of two markets. The bond market finally gives the investor an attractive yield, specifically in the two-year maturity. Investment grade credit is the “sweet spot” for bond investors yielding as high as 6.5 per cent. The long end of the curve is more volatile due to future government deficit bond supply and a higher-than-desired inflation rate. The curve will continue to “un-invert” and should steepen when and if central banks lower rates in 2024.

The stock market is still very pricy relative to bond yields. As well, cost pressures and a weakened economy will impact earnings in the fourth quarter. It will be a while until the U.S. Federal Reserve comes to the stock market rescue. The tech names will still be attractive to the passive inflow of index buying. But the sector is vulnerable to higher long-term rates. Avenue is positioned very defensively, with a high cash position and our usual hedge against a severe drop in markets. Many of our investments are defensive, and at this point we hold the lowest weighting towards banks.

Concerning the real estate sector, there are signs of value for some companies. Although the recovery will be long and painful, discounts to net asset value are starting to look attractive.

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TOP PICKS:

Telus bonds

Telus is conservatively leveraged and has a very stable business that most are familiar with. Free cash flow protects the balance sheet.  This bond yields about 5.5 per cent and is rated as an investment grade bond (BBB DBRS)

Alimentation Couche-Tard (ATD TSX)

The second largest store chain in North America continues to find accretive acquisitions and continues to grow its EBITDA. The company will do well despite the economy potentially entering a recession. The company trades at 17 times 2024 estimates, which is neither cheap nor expensive. At Avenue we are willing to pay for quality earnings such as Couche-Tard. Their growth will come via integration of new stores, current cost cutting and their new five drivers of “winning” strategy.

Osisko Gold Royalties (OR TSX)

PAST PICKS: September 22, 2022

StorageVault Canada (SVI TSX)

• Then: $5.68
• Now: $4.62
• Return: -19%
• Total Return: -18%

Canadian Apartment REIT (CAR.UN TSX)

• Then: $42.03
• Now: $45.10
• Return: 7%
• Total Return: 11%

Nexus Industrial REIT (NXR.UN TSX)

• Then: $8.99
• Now: $7.06
• Return: -21%
• Total Return: -15%

Total Return Average: -7%