Nick Majendie.Lyle Stafford/The Globe and Mail
Nick Majendie is portfolio adviser at ScotiaMcleod's Anchor Funds. His focus is Canadian large caps.
Top Picks:
TransAlta Corp. (TA TSX)
TransAlta has been meeting their guidance as well as our expectations year-to-date. However, the stock has recently hit new lows. We are not aware of any fundamental reason for the weakness. Operating rates in the Alberta power operations are at or better than plan in terms of reliability. The shares are selling at their lowest P/CF multiple in the last 25 years with the exception of the low point in the 2008 bear market. We expect cash flow per share growth of about 4 per cent a year the next three years and then a sharp jump with the Power Purchase Agreement expiry. We do not expect a dividend increase until that point but we see healthy double-digit total shareholder returns on a 3-4 year time frame. Investors however will need to be patient.
Teck Resources (TCK.B TSX)
Teck has been in a trading range between $22 and $31 over the last year and has recently been moving to the low end of that range. We do not expect any joy in copper and metallurgical prices over the next two or three quarters. However, zinc prices may well surprise on the upside. We like the company's balance sheet and its cost control efforts and believe the dividend is in no danger of being cut given our outlook on coal and copper prices. When Fort Hills come on stream in 2017/2018, we believe Teck shares could be selling at least at double their current price. Again as with TransAlta, investors have to be patient as the shares could tread water in the short term.
Brookfield Property Partners (BPY.UN TSX)
In early December, we completed a switch out of Brookfield Office Properties (BPO) into Brookfield Property Partners (BPY.UN). We already owned BPO which had jumped by over 15 per cent when BPY announced its offer for BPO. Also, in Q4, BPY announced that it had substantially increased its ownership in General Growth Properties – the second largest mall operator in the U.S. – to 32 per cent. Returns on GGP are expected to exceed BPY's 12-15 per cent targeted return range. Completion of the BPO transaction in June increased the public float to about 33 per cent – big enough to attract institutional investors and improve the valuation of BPY, which is currently at a substantial discount to U.S. peers. BPY's mission is to be the leading globally diversified owner and operator of high quality real estate assets with the objective of earning a 20-per-cent per annum return for investors over the next five years. BPY.UN current dividend yields 5.1 per cent and we expect the distribution to grow by at least 4 per cent a year.
Past Picks: Sep. 16, 2013
Bonavista Energy (BNP TSX)
Then: $13.01; Now: $13.26 +1.92%; Total return: +7.90%
Brookfield Property Partners (BPY.UN TSX)
Then: $20.01; Now: $23.30 +16.44%; Total return: +22.34%
Pembina Pipeline (PPL TSX)
Then: $32.35; Now: $52.07 +60.96%; Total return: +69.97%
Total return average: +33.40%
Market outlook:
Equity markets in North America have experienced only a very modest correction from recent peaks. In mid-term U.S. congressional election years, Q2 and Q3 have seen market pullbacks on average over the last 50 years (not the case so far in 2014). However, clarification of the political balance of power in Congress has led to robust returns historically in Q4 through to the spring of the following year (2015 in this era). We are still in the camp of expecting equity markets to be higher than current levels by year-end and to offer decent returns (more so for the TSX than the S&P 500) in 2015. In all likelihood, the next bear market is unlikely to occur unless there is a U.S. recession in prospect, which we do not see before 2016.