Market Outlook:
Despite a more benign interest rate environment, the risk of tightening credit conditions has not gone away. While we do not expect a credit crunch like the great financial crisis, it is expected that lending standards at banks have become more stringent in recent weeks. One issue that is getting a lot of attention is the amount of commercial real estate (CRE) debt outstanding. According to Mortgage Bankers Association, the total CRE mortgage debt outstanding is $4.4 trillion, of which $450 billion is set to mature in 2023. U.S. commercial banks also held $455 billion of construction and land development loans as of early March. With muted transaction volumes and office vacancies near all-time highs, fears of asset write-downs are elevated. Historically, a cooling in bank lending trickles through the economy, making a recession more likely.
Notwithstanding the growing risk of a recession, there are several earnings tailwinds that will help protect corporate margins if the economy softens. The U.S. Dollar Index fell by 2.7 per cent in March and is down more than 10 per cent from its highs last year, a meaningful tailwind for U.S. companies with multinational operations. Supply chains and inventories are normalizing, resulting in a much more predictable global trading environment. Cost-cutting announcements and layoffs show that management teams are taking profitability seriously. Layoffs first started in tech but have spread to other large companies. It’s also important to remember that markets are forward-looking with the ability to look past near-term headwinds and price in next year’s earnings. We are focused on companies that can protect margins in the short term while preserving their ability to invest and grow once economic conditions improve.
Top Picks:
Medtronic (MDT NYSE)
Purchased March 24, 2023, at $79.20
Is a large, diversified medical equipment company. Core segments include some of the fastest-growing end-markets in MedTech: cardiology, medical surgery, diabetes and neuroscience. Attractive 3.4 per cent dividend yield with a five-year CAGR of eight per cent, expecting dividend bump in May. Last two years of headwinds behind them (FX, supply chain disruptions, inflation); we think MDT can become a beat + raise story in 2023.
Tourmaline Oil (TOU TSX)
Purchased March 16, 2023, at $54.35
Largest natural gas producer in Canada and the lowest capital cost operator in the basin. Largest insider ownership amongst senior E&P peers. Base dividend and expected special dividends result in close to a 10 per cent yield on the current share price, paid to wait until supply and demand of natural gas balances in 2024-25 results in higher commodity prices.
Granite REIT (GRT.UN TSX)
Purchased Oct. 12, 2022 $65.50
Granite is cheap and the fundamentals are excellent. The REIT trading price has been under pressure given the negative real estate narrative in the media (office). Granite is an industrial REIT, its portfolio occupancy is 99 per cent, management expects net operating income growth of seven per cent in 2023. It has addressed lease expiries with rent uplifts of 20 per cent. Trades at 15 per cent discount to NAV and has a four per cent yield.
| Disclosure | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| MDT NYSE | N | N | Y |
| TOU TSX | N | N | Y |
| GET.UN TSX | N | N | Y |
Topaz Energy (TPZ TSX)
- Then: $22.39
- Now: $18.99
- Return: -15%
- Total Return: -10%
George Weston (WN TSX)
- Then: $154.23
- Now: $180.27
- Return: 17%
- Total Return: 19%
Cargojet (CJT TSX)
- Then: $150.35
- Now: $106.09
- Return: -29%
- Total Return: -29%
Total Return Average: -7%
| Disclosure | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| TPZ TSX | N | N | Y |
| WN TSX | N | N | Y |
| CJT TSX | N | N | Y |
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