Robert McWhirter, president of Selective Asset Management

FOCUS: Canadian dividend and small-cap stocks

MARKET OUTLOOK:

The bull market in equities that began in late 2018 appears to be entering a 15 to 20 percent correction that may last until the end of this year.

High price to sales and price to earnings growth stocks are expected to experience the largest price declines.

Wednesday’s stronger than expected inflation data has raised concerns that the rise in inflation may not be transitory leading to tighter monetary policy.

Gold and gold stocks may benefit from a rotation to capital protection.

We believe this is a correction in the secular bull market in equities that began in 2008 and is expected to run into 2030.

TOP PICKS:

Tourmaline Oil (TOU TSX) S&P/TSX $29.24  $8.5 billion market cap

Tourmaline is an oil and gas exploration and production company operating in the Alberta Deep Basin, Northeast B.C. Montney and the Peace River Triassic Oil Complex. TOU has a 1.9 per cent yield and a low 10 per cent payout of four quarter trailing cash flow.

Tourmaline’s free cash flow grew 747 per cent year-over-year to $408 million on a four-quarter trailing basis giving a free cash flow yield of 4.8 per cent. Recently reported sales per share grew 66 per cent while cash flow per share grew 103 per cent. Tourmaline’s earnings per share are forecast to grow 307 per cent to $3.21 in cy 2021 giving a cy 2021 price/earnings multiple of 9.0x. Analysts’ eps estimates for cy 2021 were revised UP by 51 per cent in the past 90 days. Tourmaline’s forecast ROE for cy 2021 is 10.6 per cent(C+). On May 6th, Joe Farrell quantitative technical analyst at iA Securities noted “The stock has reversed the primary downtrend in force since 2014

 ….The breakout projects further technical upside back to the late 2016 high at $36.50” implying 27 per cent potential upside.

Lundin Mining (LUN TSX) S&P/TSX $14.40  $11.0  billion market cap

Lundin Mining is a diversified base metals mining company producing copper, nickel and zinc.

LUN has a 1.2 per cent yield and a low 11 per cent payout of four quarter trailing cash flow. Lundin’s free cash flow grew 300 per cent year-over-year to $520 million on a four-quarter trailing basis giving a free cash flow yield of 4.7 per cent. In the most recently reported quarter sales per share grew 69 per cent while cash flow per share grew 840 per cent. Lundin Mining earnings per share are forecast to grow 196 per cent to $1.13  in cy 2021 giving a cy 2021 price/earnings  multiple of 13.2x. Analysts’ eps estimates for cy 2021 were revised UP by 32 per cent in the past 90 days. Lundin Mining forecast ROE for cy 2021 is 17 per cent (B+). On April 27 th Joe Farrell, quantitative technical analyst at iA Securities noted  “The stock has resolved a decade-long basing formation to the upside. The base supports further technical upside in excess of $20.00”, implies 34 per cent potential upside.

Russel Metals (RUS TSX) S&P/TSX $32.59   $2.0 billion market cap

Russel Metals primarily distributes steel products through three segments: metals service centers, energy products and steel distributors.

Russel Metals has a 4.7 per cent yield and a 49 per cent payout of four quarter trailing cash flow and a 3.8 per cent free cash flow yield. Russel Metal’s free cash flow grew 423 per cent to $76 million on a four-quarter trailing basis.

Russel Metals reported results on May 4h. Sales per share were up eight per cent and earnings were up 346 per cent, 66 percent above analysts’ expectations. Russel Metals’ earnings per share are forecast to grow 270 per cent to $3.55 in CY 2021 resulting in a 9.6X forecast p/e multiple. Analysts’ earnings estimates for CY 2021 were revised UP by 97 per cent in the past 90 days. Their forecasted ROE for CY 2021 is 22.4 per cent (A-). On May 5th Joe Farrell. Technical analyst with iA Securities noted “The stock has clearly reversed the primary downtrend in force since mid-2014 to the upside….and introduces further technical upside back to that mid-2014 high above $37.60.” Implies 11 per cent potential upside.

PAST PICKS: May 29, 2020

Open Text (OTEX TSX)

• Then: $57.20
• Now: $55.70
• Return: -3%
• Total Return: -1%

Protech Home Medical (PTQ TSXV) now called QUIPT Home Medical ticker QIPT TSXV as of TODAY May 13, 2021

• Then: $5.16
• Now: $8.01
• Return: +55%
• Total Return: +55%

Tourmaline Oil (TOU TSX)

• Then: $13.68
• Now: $29.09
• Return: +113%
• Total Return: +120%

Total Return Average: +58%