Michael Sprung, president, Sprung Investment Management

FOCUS: Canadian large-cap stocks

MARKET OUTLOOK:

It has been a year since the war in Ukraine started. Pandemic concerns continue to linger. Rising interest rates have bitten into asset valuations as the central banks attempt to combat inflationary trends after years of unusually low rates that encouraged massive debt accumulations in both the public and private sectors.

Within the capital markets, the largest impact has been evident in the negative performance of many of the securities that have been the leaders over the past number of years; most notably in the technology sectors.

As interest rates continue to climb, fears of a recession are increasing. Economists are very much divided as to the severity and duration that the potential recession may endure.

It is our view that the era of low interest rates is over. Geopolitical tensions has curtailed the trend towards globalization of the last three decades as security of supply issues have come to the fore. In this environment, economic growth will be more constrained. Liquidity and debt concerns will cause some market disturbances.

Investors will focus more on the securities of companies with stronger value characteristics such as profitability and strong financial positions.

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TOP PICKS:

Alaris Equity Partners (AD.UN TSX)
Alaris is an open-ended investment trust providing alternative financing to private companies in a diverse range of industries. Alaris receives distributions that participate in the improving metrics of its partner companies. Opportunities for capital deployment are increasing as rising interest rates make Alaris' offerings more attractive to business owners. The company also invests in common shares of some of its companies. The market appears to be overlooking the strong operating and growth profile of Alaris in the current environment. The units are selling near book value and are currently yielding 7.7 per cent.

Cascades (CAS TSX)
Cascades is a manufacturer of tissue and paperboard packaging products composed mainly of recycled fibres with more than 80 facilities in Canada and the U.S.  Inflation and lower volumes of product sales have had a negative impact on near-term profitability. The Bear Island containerboard facility will be coming online this quarter bringing greater operational efficiencies. The tissue business has been impacted by cost inflation and lags in realizing price increases but it is anticipated that pulp and recovered paper prices will moderate and higher margins can be achieved. The valuation is very attractive at 1/2 book value with a current yield is around 5.2 per cent.

Enbridge (ENB TSX)
Enbridge operates an extensive network of crude oil, liquids and natural gas pipelines, gas distribution utilities and renewable power generation. The Mainline System has a capacity of 3.1 million barrels per day and transports 25 per cent of all North American crude oil and diluted bitumen. Enbridge has a $17 billion backlog of projects that will contribute to increasing cash flows and future dividend increases. The balance sheet is strong and the dividend currently supports a 6.6 per cent yield.

PAST PICKS: Feb. 1, 2022

Bank of Nova Scotia (BNS TSX)
•    Then: $92.24
•    Now: $72.40
•    Return: -22%
•    Total Return: -17%

Alimentation Couche-Tard (ATD TSX)
•    Then: $53.12
•    Now: $59.18
•    Return: 11%
•    Total Return: 12%

Aecon Group (ARE TSX)
•    Then: $17.81
•    Now: $10.86
•    Return: -39%
•    Total Return: -35%

Total Return Average: -13%