Editor's note: Today we present the third and final instalment of this week's inaugural Encounter roundtable, moderated by our columnist Sonita Horvitch and devoted to Canadian equities. Our panellists: 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. Part one of our coverage focused on the implications of the strong market rebound in Canada, while part two turned to investment discipline and specific names. In today's instalment, the managers conclude their discussion of what they're buying or selling, and why.
Q: Let's discuss Canadian bank stocks.
Pennington: My approach in a number of sectors is to choose stocks within them that have substantially different characteristics. Bank stocks are a case in point. Toronto-Dominion Bank ( TD) and Canadian Imperial Bank of Commerce ( CM) have very different risk profiles and thus provide good diversification in the banking sector.
Macklin: I own TD. It has a good U.S. growth pattern that is retail driven. It is one of my biggest holdings in the fund.
Hardacre: I also own it. I like the strategy that CEO Ed Clark has put in place. Its valuation is OK.
Pennington: TD trades at 12.8 times earnings for fiscal 2009 and 12.4 times fiscal 2010. There is not much difference. Its earnings next year are likely to be just marginally better than what they are in this current fiscal year. We are not anticipating a significant rebound in loan-loss provisions. It will benefit from expanding Canadian net interest margins, but there will be shrinking loan growth. TD does not have a lot of leverage to the economic recovery in the shorter term. But it is a great long-term core business. There is limited downside risk. It trades at a discount to long-term fair market value.
In contrast, Commerce is a higher-risk bank with greater leverage to the economic recovery. It is a cheaper stock. The stock trades at 11.5 times fiscal 2009 earnings and 11 times 2010 earnings. It has greater potential upside and greater potential downside than TD.
Q: Suzann, any sells?
Pennington:. I took profits in my holding in Methanex Corp. ( MX), a methanol producer. We bought the stock in the spring and it had a tremendous rebound off its lows. It has slipped back since we trimmed it.
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| Suzann Pennington: TD is "a great long-term core business" with "limited downside risk." | |
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I also took profits in my holding in North American convenience store chain Alimentation Couche-Tard Inc. ( ATD.B). We bought it last year and the stock did well. We maintained our weighting by selling the extra that had come from the stock price appreciation.
Macklin: I took profits in Couche-Tard too. It is a still a core holding. It is a good expansion story in the consumer staples sector. Its growth is in the United States. The stock is a bit expensive right now.
Hardacre: We have trimmed it as well, for portfolio management purposes. We still have a big weighting in it.
Q: Ted, you are the only growth manager at the table. Time to talk process and picks, focusing onBMO Guardian Canadian Large Cap Equity, which is one of your many mandates at Guardian.
Macklin: It is a growth at a reasonable price or GARP discipline. It is a bottom-up fundamental approach. It is qualitative as opposed to quantitative. We do utilize screens as a tool. It does not drive the process. We spend a lot of time meeting the management teams of companies. We talk to the companies we are looking to invest in, their competitors, customers, suppliers, etc.
The fund has a large-cap-oriented mandate; 80% of the holdings will always be in the S&P/TSX 60 Index. Some 20% are mid-caps with at least $1 billion in market capitalization. We also have a strong discipline of risk management. At Guardian Capital, we have, over the long term, been able to deliver favourable returns with less volatility than the overall marketplace. The portfolio currently has 35 names, which is relatively focused, but still permits prudent diversification.
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| Ted Macklin: Couche-Tard is "a good expansion story in the consumer staples sector." | |
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My first pick is Viterra Inc. ( VT), a major Canadian grain-handling company. It also has retail outlets. It is not high growth, but Viterra is going to get some growth out of a recent acquisition, ABB Grain Ltd., of Australia. This acquisition offers geographic diversification and provides exposure to the Asian markets.
If you believe in the long-term growth in Asia, (including) China and India, then this is a way to play it. Viterra is a new name in the portfolio and currently represents 2.2% of the fund. I have been accumulating the stock since the summer. The stock trades at 14 times the consensus EPS (earnings per share) estimates for the fiscal year to October 2010.
A core holding in the portfolio that I recently added to on weakness is Research in Motion Ltd. ( RIM). The stock corrected sharply in the recent quarter, because the market was disappointed with the forward guidance on the average selling price of its devices.
It has been dominant in the corporate marketplace, and it is moving into the consumer market. The naysayers are questioning whether it will succeed in this. There are a number of competitors in this market. RIM is dominant on security, product innovation, and bandwidth efficiency, which is important for the user and the service provider.
As it expands, it is lowering its pricing point, but it is expecting to boost its volumes. RIM can still grow earnings at 20% to 25% per annum and the stock is trading at some 13 to 14 times earnings. RIM has strong management, a good balance sheet and a great franchise. It represents 4.2% of the portfolio and is in the top 10 holdings.
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| Ian Hardacre: RIM is "a proven company, with a proven management team." | |
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Hardacre: I own it. It is 2% of the fund. The risk/reward trade-off is excellent. It is a proven company, with a proven management team. It trades at 13 times EPS. We realize there is a technology risk.
Macklin: My third pick is Canadian National Railway Co. ( CNR).
Pennington: I own it.
Hardacre: I own it in a related mandate.
Macklin: It was a switch out of Canadian Pacific Railway Ltd. ( CP) in the Canadian large-cap mandate. In my broader mandates, I own both stocks. CP had a big move recently. It finally made some improvement on its efficiency ratio.
The stock got a little ahead of itself and I switched into CNR. It is arguably one of the best railways in North America. CNR is trading at 14 times earnings per share. It is at a slight discount to CP. Despite the economic downturn, CNR has been able to increase its dividend. It has leverage to an improving economy.
