As we start the new decade, we remain very cautious on the outlook for investments.
Global geopolitical tensions have spiked since the American raid that took the life of a prominent Iranian general. The unrest in the Middle East just adds to the other concerns surrounding global trade disputes, US-China relations, South Asian boundry differences, European fragmentaion, decelerating global economic growth and many others. All of this is ocurring following a decade of largely positive investment returns during which capital investment has deteriorated as returns have been bolstered by increasing share buybacks and historically low interest rates. These conditions have led to increasing security valuations and massive increases in global debt.
The stock market has primarily been bolstered by investors chasing securities with high growth rates even if profitability is elusive.
Given these conditions, we anticipate that as the excesses of the past decade come to light, investors will focus more on securities with more solid fundamentals in earnings, balance sheet leverage and management.
Manulife Financial Corporation, MFC-T, Owned personally and by clients, Last Purchase August 2019, $21.69
Manulife is a leading Canadian-based financial services group with operations in 21 countries including several in Asia as well as Canada and the United States. The company is well positioned in Asia where they continue to experience high growth and profitability; 50% of Manulife’s core earnings now stem from Asia where profitability is greater than the home market. Manulife is very well capitalized and continues to optimize the balance sheet through debt reduction. A transaction involving the sale of low profit legacy businesses, particularly LTC, would be a positive catalyst.These steps would further solidify an already strong balance sheet as several billion dollars of capital will become avaiable. After a period of several years, the company is well positioned to continue periodic increases to the dividend. The valuation is attractive at just over book value with a current yield of 3.8%.
Suncor Energy Inc., SU-T, Owned personally and by clients, Last Purchase August 2019, $37.26
Suncor is Canada’s largest integrated energy company. The company has an extremely strong upstream asset base and the top downstream business in North America. Suncor is the most profitable Canadian refiner. The company generates very strong free cash flow, higher than its Canadian and global peers. Over the next two years it is anticipated that free cash flow could increse by $2 billion. Ongoing stock repurchases and dividends will return capital to shareholders. At current levels, the stock yields 3.9%.
New Flyer Group Inc., NFI-T, Owned by clients, Last Purchase August 2019, $28.75
NFI Group is North America’s leading manufacturer of transit buses and motor coaches, and the leading distributor of aftermarket parts. Since taking some profits in March 2018 at $58.60, the share price has retreated to where it is once again attractive to patient investors. The share price decline may have been indicative of some expansion in industry capacity as well as a recent weakening of industry demand resulting in lower than anticipated backlogs. Alexander Dennis Limited (ADL) in the UK has been experiencing declining demand however Berlin has recently ordered 430 buses offsetting some of this decline. A stabilization in industry demand through fleet expansions or replacements would provide a catalyst for a greater valuation. At current prices, the stock yields 6.0%.
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The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.