A global oil and gas stock that yields about six per cent and a financial services stock yielding about 10 per cent are Toronto-based portfolio manager Michael Sprung’s two favourite stock picks. He says Canada “is very well-positioned to participate in a global economic recovery”.
While volatility since winter “may or may not be indicative of a protracted market downturn”, it does signal shifting investor priorities, suggests Michael Sprung, founder of Sprung Investment Management in Toronto. He is a chartered financial analyst who serves as president and a portfolio manager at his namesake boutique investing firm.
Elaborating on the shift, Mr. Sprung explains: “I’d very much describe the last year as price-driven markets.” That is, investors largely put money into companies simply on the basis that their shares were rising, thus further inflating prices.
The portfolio manager notes that the major technology stocks and other, more speculative corners of the economy (such as medical marijuana stocks) had driven most of the increases over the last couple of years up to January, despite relatively negligible or even negative earnings. Investors during the period chose to bet on future growth.
By contrast, the recent ups and downs are “forcing people into more higher-quality securities,” says Mr. Sprung. “It’s going to be much more of a ‘show-me’ kind of a market where people are going to want to see the road to earnings and the road to profitability,” he predicts before adding: “Quality of earnings is going to become much more important.”
Avoid tech stocks and long-term fixed-income
The analyst advises against holding the major technology stocks, as well as stocks in emerging industries, given their room to fall. He further recommends that investors avoid taking long positions in fixed-income investments, especially as interest rates rise and capital moves to other areas of the market in anticipation of growth. “We are very short in almost all of our fixed-income investments.”
Generally speaking, the larger economic outlook remains healthy, with a caveat. Mr. Sprung recalls that before the pullback in winter: “Everybody was talking about synchronized global growth from an economic point of view.”
Key to this rosy prognosis was simultaneous growth in both emerging and developed economies. In fact, the consensus expected better worldwide economic expansion this year than in the last five. However, Mr. Sprung admits: “A lot of that future will be dependent on the global trade issues.”
In Canada, the picture is also sound. “The country is very well-positioned to participate in a global economic recovery,” says the analyst. If NAFTA negotiations are positive, closeness to US growth further sweetens prospects back at home.
The analyst argues that the energy sector offers the best domestic potential for share prices to rise. After years in the doldrums, the energy sector is rising again. Because of the previous slump, many oil and gas stocks offer good value to shareholders, Mr. Sprung argues. “Those that have had stronger balance sheets and better management have been able to take advantage of some of the opportunities that have come up.”
2 stocks with high dividends
Reflecting this view, his first ‘best buy’ pick is Vermilion Energy Inc. (TSX—VET; NYSE—VET). The oil and gas stock is very well-diversified with operations in Canada, Australia, France, the Netherlands and more.
Vermilion is able to generate free cash flow at current energy prices and its balance sheet is “very solid”, enough to recently hike its dividend by seven per cent to $2.76 a share annually.
“Given their position, this is a company that has proven itself to be very savvy,” says Mr. Sprung. He praises Vermilion’s investment in Spartan Energy Corp. assets on “very, very advantageous terms” and points out that its Australian presence means it can serve emerging markets in the Far East. “It is one that people should seriously consider.”
Both Vermilion and financial services stock Alaris Royalty Corp. (TSX—AD), Mr. Sprung’s second ‘best buy’, boast very high dividend yields, at six per cent and 9.3 per cent (as of April 24), respectively, meaning that shareholders can look forward to being paid nicely even if the wait for price gains turns out to take longer than hoped.
The analyst says of Alaris: “It’s a company that’s selling at a compelling valuation.” He explains that shares took a lasting hit because of issues at several underperforming companies in the Alaris stable. (The company makes capital investments in other firms in exchange for ownership of preferred shares.)
Its lofty dividend yield stoked further share-depressing fears of a cut. However, only five out of 16 Alaris partners were underperforming, and Alaris has already largely resolved the under-performers’ cash flow problems, according to Mr. Sprung. “As they deploy more funds going forward, they will create more cash flow and there will be more dividend increases possible,” he predicts, leading the market to notice the positive trend coming into play.
This is an edited version of an article that was originally published for subscribers in the May 11, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •6/3/18 •