Will top Canadian stocks be “the envy of the world”?

Top Canadian stocks like financial stocks and oil and gas stocks are doing very well right now. Rising interest rates are boosting the former, while infrastructure investment has created greater efficiencies in the latter industry. This leaves the senior vice-president at Goodreid Investment Counsel, Brian Madden, feeling bullish about Canadian stocks.

Canadian_StocksThe Canadian economy is the “envy of the world” at the moment, boasting 4.5 per cent GDP growth in the second quarter of 2017, but the S&P/TSX Composite Index has stayed flat year-to-date, leaving portfolio manager Brian Madden bullish. “We think there’s some catch-up to be done there,” says Mr. Madden, who is senior vice-president at Goodreid Investment Counsel in Toronto, where he is responsible for overseeing Canadian stocks.

The 20-year investing industry veteran says three looming threats have put a damper on the Canadian stock markets: the collapse of the Vancouver and Toronto housing markets; the repeal of the North American Free Trade Agreement (NAFTA); and a fall in oil prices to about US$30 per barrel. However, he says, none of these worst-case scenarios is likely to occur.

In the case of housing, the portfolio manager notes: “The government is actively taking measures to cool off the housing market so we have an orderly cooling off.” Comparing the US before the sub-prime mortgage crisis to Canada today is unfair, he adds.

Mortgage insurance requirements are stronger here, plus a tendency among lenders to retain the mortgages they originate rather than sell off the debt bolsters lenders’ drive to check borrowers’ credit strength, Mr. Madden says.

Those borrowers are also doing their part. “Canadians just don’t seem to have that propensity to walk away from homes,” the portfolio manager says, adding that the recent Alberta recession, which prompted few defaults, has demonstrated that trait.

As for the oil and gas stocks, he asserts: “Economics will limit the glut of oil.” OPEC’s (Organization of Petroleum Exporting Countries’) 2016 production cut has been extended well into this year. Meanwhile, US shale production has ramped up lately due to rising prices, but can be shut off quickly if they dip.

“The impact of electrical vehicles on oil consumption will be felt for decades but very, very slowly,” he says, encouraging production cuts over the long run. Mr. Madden suggests that these combined factors “should keep prices close to current levels” (that is, ranging between US$30 and US$60 per barrel).

Finally, Mr. Madden dismisses US President Donald Trump’s musings on scrapping NAFTA as primarily a negotiating tactic. He predicts that the practical business benefits of keeping the Canadian, US, and Mexican economies tied will ultimately outweigh any political gains from separating them.

“It’s the theory of comparative advantage. It’s not sensible for North Dakota to produce oranges or Florida to produce oil and gas. We need each other.”

Mr. Madden also points out that the president is not actually leading the NAFTA talks. “The principal negotiators on all three sides are bureaucrats and businesspeople and academics, not ideologues.” Although he admits the negotiation process will probably go through messy fits and starts, he says he is optimistic it will be successful.

2 best Canadian financial stocks to buy

At present, Goodreid suggests Canadian bank stocks are ones to watch in 2017 and 2018. “Canada has a banking oligopoly, the banks have strong governance, and . . . the banks present leveraged exposure to (general) economic growth,” Mr. Madden argues. “They’re perennial out-performers.” The combination of higher interest rates and more business activity creates a perfect storm for the sector. “The banks should benefit from that in multiples,” says Mr. Madden.

As such, both of the portfolio manager’s ‘best buy’ stocks, Gluskin Sheff + Associates Inc. (TSX—GS) and the Bank of Nova Scotia (TSX—BNS; NYSE—BNS), are financial stocks.

Gluskin Sheff is an asset manager in charge of more than $9 billion in equity. It offers a product line with management fees that are half that of typical mutual funds and caters to long-term wealthy clients (the minimum investment is several million dollars).

“That creates very stable recurring cash flow,” says Mr. Madden. Gluskin’s dividend yields about five per cent annually, at $0.25 per quarter. Adding in special payments based on investing performance that the company usually pays out as special dividends, that yield can grow to 10 per cent.

Gluskin Sheff has also increased marketing in the last few quarters, resolved a conflict with its founders, and appointed a new CEO, a company veteran. All of these efforts should open the way to new growth, Mr. Madden argues.

As for Scotiabank, it ranks as Goodreid’s favourite bank because of its strong international presence. In addition, Mr. Madden says: “It’s really firing on all cylinders in the Canadian market in our view.” However, he points out that its international business has grown fastest, at about 16 per cent on an annual basis.

This is an edited version of an article that was originally published for subscribers in the October 6, 2017, 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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