Canadian equities roundtable: Picks from the pros

Our panellists weigh in with some of their favourite building blocks.

Sonita Horvitch 21 October, 2009 | 6:00PM
Editor's note: With the Canadian equity market's huge rebound from its March lows, portfolio managers must now ponder what sectors and stock picks can best produce further gains or endure potential future shocks. In part one of our inaugural Encounter round table, we focused on broad market trends in Canada. In today's second instalment, our columnist Sonita Horvitch asks Ian Hardacre, vice-president of Invesco Trimark Ltd.; Ted Macklin, managing director at Guardian Capital LP; and Suzann Pennington, chief investment officer at Howson Tattersall Investment Counsel Ltd., to discuss their respective disciplines and stock picks. This week's three-part series concludes Friday with more picks from the pros.

Q: Time to talk about your portfolios. Ian, can you discuss your picks as a value manager.

Hardacre: I will focus onTrimark Canadian , which has $1.6 billion in assets. It can have a maximum 40% in foreign content. It currently has one third, most of which is in the United States. I do not invest in businesses in the foreign content that I can obtain in Canada but use the foreign content, for example, for technology companies such as computer giant, Dell Corp. ( DELL) and consumer discretionary stocks such as travel company Carnival Corp. ( CCL). I do have substantial weightings in both those sectors.

I look for high-quality companies with good management teams that are reasonably valued, because they, perhaps, are under some cloud. Given the size of the fund, I tend to focus on mid- and large-caps. The fund has a low turnover. Some of the names in the top 10 holdings have been there for five to 10 years, I am not in the buy-and-hold category. To me, buy and hold is buy and ignore.

Macklin: No active manager buys and holds; you have to keep monitoring all your holdings.

Hardacre: The largest holding in Trimark Canadian is MacDonald Dettwiler and Associates Ltd. ( MDA), which is about 6.5% of the fund.

Macklin: It is a good company.

Hardacre: Its information-systems and geospatial-services operations are doing well. The land and property information-services division is more cyclical. The latter business, particularly its UK operations, has suffered in the economic downturn. The stock trades at a P/E (price-earnings) multiple of 12 to 13 times, and there is good upside in earnings, particularly from its UK real-estate-related business.

Ian Hardacre: "I look for high-quality companies with good management teams that are reasonably valued."

Gold stocks represent about 4% of Trimark Canadian. One holding is Yamana Gold Inc. ( YRI), a mid-sized Canadian gold producer. It produces about 1.1 million ounces per year and has a good record of replacing production. The company has a strong portfolio of new projects. Its key assets are in South America, an area of the world that is relatively mining-friendly. Yamana's management has a significant holding in the company. The stock trades at a big discount to its peers, based on respective cash-flow multiples.

Macklin: Gold stocks represent 10.6% of the S&P/TSX Composite Index. I have always held gold stocks for ballast in the portfolio. InBMO Guardian Canadian Large Cap Equity, I currently have 7% in gold stocks, which is historically high. The weighting is split between two senior producers: Goldcorp Inc. ( G) and Barrick Gold Corp. ( ABX).

Pennington: Gold stocks introduce an element of diversification that you simply cannot get anywhere else in the universe. We typically have a number of gold stocks in theMackenzie Saxon Stock  portfolio, including such names as Kinross Gold Corp. ( K) and Goldcorp.

Ted Macklin: "No active manager buys and holds; you have to keep monitoring all your holdings."

Hardacre: In the Canadian financial services sector, I have a significant weighting in Brookfield Asset Management Inc. ( BAM.A). It is in the top 10 holdings of Trimark Canadian. I have been building this holding over the past 18 months to two years. BAM operates in a number of fields such as real estate -- it is a major shareholder in Brookfield Properties Corp. ( BPO), power generation, infrastructure and finance. It is a complicated company to analyze. We like the management team. There is huge opportunity over the next six months for the company to buy quality assets at a discount.

Q: Suzann, you like Ian are a value manager.

Pennington: There are a few differences in our approach from that of Ian. We consider small, medium and large companies for Mackenzie Saxon Stock. It therefore makes sense for us to use value screens as a first step in our stock-selection process. Our second step is to estimate the fair market value for companies. We expect that the stock we buy will go up to our estimated fair market value. Any appreciation in fair market value is a bonus.

Portfolio construction is important. We believe that we cannot time markets and are therefore fully invested at all times. The portfolio is widely diversified and we do not take large bets on single names. We generally have 40 to 55 names, the bulk of which are Canadian.

Q: And how about your stock picks, Suzann?

Suzann Pennington: "We believe that we cannot time markets and are therefore fully invested at all times."

Pennington: Sun Life Financial Inc. ( SLF) offers good value.

Macklin: I own it too. It has an attractive valuation, a good business with a lot of potential in Asia. It is more of a longer-term stock.

Pennington: All of my picks have a longer-term focus. We look at valuations relative to normalized earnings over a cycle. We recognize that Sun Life is increasing its reserves, which will put a drag on earnings and its return on equity in the short term. The long-term sustainable ROE (return on equity) for the company is more in the 12% to 14% range. The stock trades barely above book value per share. It is inexpensive.

A pipeline/power company that also offers value is TransCanada Corp. ( TRP).

Macklin: I own it too.

Pennington: From my experience, it is positive for the stock, if both value managers and growth managers own it.

We value TransCanada's pipeline assets separately from the power-generation assets. We put a lower multiple on the power-generation assets because of the volatility of the earnings stream. TransCanada is trading at less than 15 times price to earnings per share. It has a 4.5% dividend yield. Its historic P/E multiple range is 18 to 20 times. The stock has underperformed in the recent rally, as has Sun Life. This is why they are coming to the top of my valuation screens.

Photos: Paul Lawrence

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Sonita Horvitch

Sonita Horvitch