Chris Blumas, portfolio manager at Raymond James Investment Counsel

FOCUS: North American large caps

MARKET OUTLOOK:

In 2020, it was the mega-cap technology companies that lead the market higher. So far this year, it has been the cyclical sectors of the market that are driving performance. Leading the way have been the energy and financial sectors as higher oil prices and lower credit losses have boosted profits for energy producers and banks and driven share prices higher. Pent up demand and supply constraints brought on by the global pandemic have caused upward pressure on the prices of almost every commodity. As the global economy continues to reopen, the threat of higher inflation and the potential for higher interest rates are likely to continue to overhang the equity markets.

Ultra-low rates and a wave of liquidity have created an updraft in valuations that has spread across almost every asset class, geography, and sector. While the shape and the duration of the current economic recovery remain unclear, there are pockets of value in today’s equity markets, and I think that investors should remain well diversified and defensively positioned and avoid the temptation to speculate and chase returns. Sectors of the market that look to offer attractive value in today’s market include health care, energy infrastructure, financials, REIT’s, and growth-oriented utilities. 

If market uncertainty or volatility is causing you to question your investment strategy, it may be time for a second opinion. By reviewing your asset, account, and individual security allocations you can better understand the level of risk and tax efficiency of your portfolio. If you would like to set-up a review, please contact me at your convenience.

TOP PICKS:

Abbott Labs (ABT NYSE)

US$109.29 on 2021-06-05; most recent purchase at US$107.25 on 2021-06-02

Abbott is a medical equipment company with a strong international presence. The company’s two main profit centres are its diagnostic testing business and its medical devices business. Last year, these business accounted for around 75 per cent of Abbott’s operating profit. Last week the company updated its earnings guidance for the current year and reduced its forecast by about 12 per cent. The main issue is an expected decline in COVID-19 testing revenue as vaccines become the preferred re-opening tool to combat the pandemic. The shares currently trade at 23x forward earnings and are trading in-line with the diversified peer group. However, the company has a stronger underlying growth profile and a valuation premium is warranted.  

Artis REIT (AX-U TSX)

$11.39 2021-06-05; most recent purchase at $11.00 on 2021-05-18

Artis is a diversified REIT with a mix of office, industrial, and retail properties (Q4 2020 NOI mix: office 45 per cent, industrial 35 per cent, retail 20 per cent). The trust currently generates half of its operating income in Canada and half in the US. Diversified REIT’s are out of favour and trade at dramatically lower valuations than other real estate subsectors. Artis recently reconfigured its board and appointed a new CEO with the aim of improving capital allocation and maximizing value for unitholders. The transformation plan proposed by management will take 2-3 years to implement and is designed to create an asset management platform with the optionality to invest in public and private real estate markets on a value basis. The units currently trade at 8.5x current year funds from operations and have a distribution yield of 5.3 per cent. At Q1 2021, the IFRS NAV per unit was $15.34 and the current discount to NAV of 25 per cent is among the largest discounts in the Canadian real estate universe.

Enghouse Systems (ENGH TSX)

$53.23 2021-06-05; most recent purchase at $54.04 on 2021-05-21

Enghouse is an enterprise software company with a global presence. Last year, more than 90 per cent of revenues were generated outside of Canada. The company acquires and manages software for several vertical markets and has a diversified product suite. Management has done a tremendous job compounding capital through acquisitions and looks for a cash flow payback within 5-6 years while minimizing shareholder dilution. While organic growth was negative again in Q1 2021, operating cash flow rose by more than 45 per cent on a trailing twelve month basis. Enghouse will be reporting Q2 results later this week and will likely provide an update on its M&A pipeline in light of easing COVID-related travel restrictions. The shares are currently down around 14 per cent year-to-date and are trading at 16x cash flows on a trailing twelve month basis. The current dividend yield is 1.2 per cent.

PAST PICKS: July 8, 2020

Dollar Tree (DLTR NASD)

• Then: $90.29
• Now: $100.44
• Return: 11%
• Total Return: 11%

CGI Inc. (GIB/A TSX)

• Then: $86.33
• Now: $109.24
• Return: 27%
• Total Return: 27%

Algonquin Power (AQN TSX)

• Then: $17.52
• Now: $19.04
• Return: 9%
• Total Return: 12%

Total Return Average: 17%

Company website: https://www.raymondjamesinvestmentcounsel.ca/

Personal website: https://vdy.prod.digitalagent.app/chris.blumas/

LinkedIn: https://www.linkedin.com/in/chris-blumas-mba-cfa-3b716b57/