Robert McWhirter, president of selective asset management

FOCUS: Canadian dividend and small-cap stocks

MARKET OUTLOOK:

On Market Call on January 5th I noted that “U.S. 10 year bond yields (0.93 per cent) had risen from their 0.52 per cent low on August 2nd and are expected to continue moving higher toward 1.4 per cent”

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, recently noted that “conditions seem ripe for (an equity) pullback. The rate of upward EPS estimate revisions appears to be peaking.”

Technical analysts agree and are expecting five to nine per cent equity index corrections.

Goldman Sachs in the U.S. raised its oil forecast to US$72 for WTI in 2021 giving rise to concerns about growth in inflation.

Yesterday U.S. 10-year bond yields hit a one-year high of 1.61 per cent. Rising bond yields also reflect improving forecasts for U.S and world GDP. The question is how far can bond yields go up before stocks are affected?

Lori Calvasina provides some perspective, “Our analysis suggests that stocks often struggle when yields move up more than 275 basis points," today the 10 year bond yield would need to hit 3.26 per cent (a doubling from yesterday’s level).

After a one to two month equity correction, we expect cyclical and small cap stocks to resume their outperformance over the next 12 months.

TOP PICKS:

Aecon (ARE TSX)

builds and operates public and private infrastructure projects. Aecon has a 3.7 per cent yield and a low 20 per cent payout of four quarter trailing cash flow and an attractive 11.7 per cent free cash flow yield. Aecon’s free cash flow (fcf) grew seven per cent year over year to $121 million on a four quarter trailing basis.

Aecon reported results on February 25h. Sales per share were up 14 per cent and earnings were up 11 per cent, 12 per cent above analysts’ expectations. Aecon’s earnings are forecast to grow 97 per cent to $1.10 in cy 2021 giving a 15.9x p/e multiple. Earnings are forecast to grow 16 per cent in cy 2022. The consensus price target from eight analysts of $20.00 implies 19 per cent potential upside. Aecon Group’s shares are not held personally, or by family members but are held in the Canadian Conservative Growth Strategy, offered by Enriched Investing.

Magna International (MG TSX)

provides diverse automotive engineering, manufacturing and contract assembly in North America and Europe. MG has a 2.3 per cent yield and a low 18 per cent payout of four quarter trailing cash flow and a 4.4 per cent free cash flow yield. Magna’s free cash flow (fcf) was $2.7 billion on a four quarter trailing basis. Magna reported results on February 19h. Sales per share were up 17 per cent and earnings were up 98 per cent, 31 per cent above analysts’ expectations. Magna's earnings are forecast to grow 91 per cent to $4.99 in cy 2021 with further earnings growth of 16 per cent forecast for cy 2022. Analysts’ earnings estimates for cy 2021 were revised up by 27 per cent in the past 90 days. Magna’s forecast ROE is 19.8 per cent (A-).

Joe Farrell technical analyst at IA Securities noted on February 19th “Magna has clearly broken out through the 2+year down sloping resistance line. The breakout targets initial technical upside in excess of $115.00. Higher longer-term technical targets can be measured in excess of $150.00” implying 38 per cent potential upside. Magna International’s shares are not held personally, or by family members but are a candidate for purchase in the Canadian Conservative Growth Strategy, offered by Enriched Investing.

Tourmaline Oil (TOU TSX)

conducts natural gas and oil acquisition, exploration, development and production in Western Canada. Tourmaline well completion costs that are 40 to 50 per cent less than many competitors. Tourmaline has a 2.0 per cent yield and a low 12 per cent payout of four quarter trailing cash flow. Tourmaline’s management forecasts $850 million of free cash flow in 2021 giving an attractive 9.8 per cent free cash flow yield to enterprise value. In Q3 sales per share grew 19 per cent while cash flow per share grew 26 per cent. TOU has a forecast cy 2021 price/cash flow multiple of 3.6x. in line with the p/cf of the average TSX energy stock yet TOU’s 55% forecast cash flow growth is almost double that of the average energy stock.

Analysts’ cash flow estimates for cy 2021 were revised up by 5.6 per cent in the past 90 days. Tourmaline’s forecast ROE for cy 2021 is 8.2 per cent (C+). On February 12, 2021 Joe Farrell technical analyst at IA Securities noted “Tourmaline has clearly reversed the primary multi-year downtrend in force since mid-2014 to the upside. The breakout marks a major bullish reversal and introduces further technical upside in excess of $30.00,” implying 29 per cent upside potential. Tourmaline shares are not held personally, are held by family members and are held in the Canadian Conservative Growth Strategy, offered by Enriched Investing.

PAST PICKS: February 7, 2020

Alimentation Couche-Tard (ATD/B TSX)                 

• Then: $45.60
• Now: $38.35
• Return: -16%
• Total Return: -15%

Centerra Gold (CG TSX)

• Then: $10.41
• Now: $13.18
• Return: +27%
• Total Return: +28%

Premium Brands Holdings (PBH TSX)

• Then: $99.20
• Now: $103.21
• Return: +4%
• Total Return: +7%

Total Return Average: +7%

Company Website:SELECTIVEASSET.COM