Editor's note: In today's third and final instalment of this week's Canadian equity roundtable, the managers' discussion turned to stocks in the consumer and telecom sectors. Our three panellists: Kim Shannon, president and chief investment officer of Sionna Investment Management Inc.; Martin Hubbes, chief investment officer at AGF Investments Inc.; and Ian Hardacre, vice-president at Invesco Trimark Ltd. They spoke with Morningstar columnist Sonita Horvitch.
Q: Time to talk about your portfolio strategy and stock selections. Martin, what is your strategy forAGF Canadian Stock, which has assets of $2.1 billion and some 88 holdings?
Hubbes: I am looking abroad. AGF Canadian Stock can have up to 49% in foreign holdings. I am currently at about 20%. The Canadian dollar is strong and we like the valuations in other markets. We are focusing on companies targeting consumers in emerging economies. My style is conservative growth. In Canada, in consumer staples, our biggest position is Metro Inc. MRU.A. We added to our holdings in Shoppers Drug Mart Corp. SC on the pullback.
Hardacre: Shoppers Drug is one of my picks for this roundtable. We had never owned Shoppers until about six months ago. We bought a small position amid the noise about regulatory changes to pharmacies and generics in Ontario, and then when the worst-case scenario hit, we added more. There could still be some downside. It is an excellent business. Management has done a great job. It trades at 13 times 2011 EPS (earnings per share) estimates. There is the risk that the other provinces will come in and recommend the same changes as Ontario.
Shannon: We also own Shoppers.
Hardacre: Trimark Canadian has assets of $1.6 billion and has a target of 45 names, of which some 35 are currently Canadian. The style is one where there is a value orientation. It is not deep value. We look for quality companies that are out of favour, and put emphasis on management. The fund is 27% non-Canadian. It can go up to 40%. We tend to hedge some of the currency over time.
Hubbes: I don't hedge currencies.
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| Martin Hubbes | |
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Hardacre: We have some companies in the portfolio that we have owned for many years, in some cases, 20 years. For example, Toromont Industries Ltd. TIH. And it has done well.
Shannon: I have roughly 40 names inBrandes Sionna Canadian Equity 
and have 10% in foreign equity. We hold it steady at that, and this is managed by Brandes. This fund is $660 million, started only three years ago. We are relative value and are also not deep value. We start with a quantitative model that helps us to identify what is truly cheap. We follow it up with testing the key numbers in the model and then do fundamental analysis.
Q: Ian, your other picks please?
Hardacre: Telus Corp. T, which we have owned for a while. It's a free-cash-flow growth story. Its capital expenditure is coming down and as free cash flow increases, Telus will start buying back stock again and increase its dividend. We like its position in Western Canada, and we also like its new TV product. Wireless is a big part of its business, which is a plus. The new competitors in this business have not been able to do much. This is good for Telus, good for Rogers Communications Inc. RCI.B and for BCE Inc. BCE. This is why the whole sector has moved up, but it remains inexpensive. The bid by Shaw Communications Inc. for the broadcast division of Canwest Global Communications Inc. will have minimal effect on Telus's ability to execute its strategy.
Shannon: I own Telus.
Hubbes: So do I.
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Hardacre: My final pick is Progress Energy Resources Corp. PRQ, which is about 2.5% of the portfolio. We have owned it for a few years. Its production is 85% natural gas and focused on the Montney Play in North-Eastern B.C. This asset package could be attractive to a large oil and gas producer. If not, it will continue to operate and grow the business. It is out of favour. No one cares about natural-gas stocks. The stock trades below net asset value.
Our sell is IGM Financial Inc. IGM. We had owned it for a long time. We saw better opportunities. It's a good business, has a decent dividend, but it will be hard for the stock to outperform.
Shannon: I have already highlighted EnCana ECA as one of my picks. I also like Shoppers. We started buying it early this year. The Ontario government's change is only a proposed change. The company has been moving away from pharmacy and emphasizing other areas such as high-margin cosmetics. It has a good management team. It should be able to cope with the challenges. The stock is cheap. The fear factor is deep in the stock price.
A recent purchase is BCE, which is more attractively priced at this point than Telus. We had been zero weight in telecom for a good part of the last seven or eight years. Telecom was a sector that investors always owned and BCE was the proxy for the Canadian stock market. It took a while for people to realize that its valuation was too rich and basic telephony was a challenge. That had to get priced into the telecom stocks. It is now priced in.
BCE has a fabulous dividend at 5.8% and there is little financial risk. The P/E ratio is modest. What took BCE into bargain territory was concern about competition in the growth area, which is wireless. There is still upside in wireless in Canada. BCE's president and CEO, George Cope is a great manager. A new culture is being built there. It is all about cost control. There is the technological enhancement that is making BCE and Telus more competitive with Rogers.
Hardacre: Telus's dividend yield is 5.3%.
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| Ian Hardacre, Kim Shannon and Martin Hubbes discuss their picks | |
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Shannon: Telus has upside too. I have never owned Rogers. It had a technological advantage and that has gone away. Also, (the late) Ted Rogers was a phenomenal CEO and he had an enormous impact. It is still too early to tell what the firm is going to be without Ted Rogers. It is still a great firm. I would not necessarily tell someone who has it at a low cost base to sell it. But if you were stepping into this sector, Rogers would not be my first choice.
Hubbes: I have owned Rogers for a long time and continue to like it. It is 3% of the fund. There is still some cost-cutting to be done. It is becoming more efficient. It can still gain market share in cable, telephone and wireless. The stock stalled, because investors were rightly concerned about the issues that Kim raised, but that is largely reflected in the price now. I think the new CEO Nadir Mohamed will turn out to be a good manager. The deal between Shaw and Canwest is unlikely to have a material effect on the key factors driving Rogers.
I'm going to pick a stock that Ian mentioned: Toromont. It's not particularly cheap. Toromont's recent and well-timed acquisition of Enerflex Systems Income Fund shows why its management is so good. Its Caterpillar dealership will continue to do well. But Toromont's growth engine is its compression business. It's a global leader in this business. This stock fits my thesis that the world is still underinvested in energy infrastructure. You need compression for new gas plays and liquefied natural gas.
Hardacre: Toromont's management has a lot of its own money in the company. I would like to find more companies like it in Canada. The company is not well known.
Hubbes: It is under-owned, which is great. This is like our position in Metro, which I have owned for 18 years. It is completely under-owned. My final selection is Suncor Energy Inc. SU and my recent sell is Yamana Gold Inc. YRI. I have already discussed both. It is interesting that we are all gravitating toward telecom-services stocks, which are cash-flow stories.
Shannon: Studies show that in a sideways equity market like I think we are in, dividend yields constitute 90% of total returns. A focus on yield is important.
Additional coverage of the Canadian equity roundtable:
- Part 1 - Can you still bank on the banks?
- Part 2 - Fuelling returns
Photos: www.paullawrencephotography.com
