Michael Sprung, president, Sprung Investment Management

FOCUS: Canadian large-cap stocks

MARKET OUTLOOK:

Markets continue to be volatile as investors react to forces impacting the economic outlook. The war in Ukraine drags on, prolonging shortages in energy and other commodities, including food. Europeans are facing a very tough winter as they are now acutely aware of the folly of creating such a great dependence on Russian exports. Global supply chains are shifting as the pandemic, and now the war, have highlighted the strategic fault lines in their design. Restructuring supply routes and manufacturing will take many years to develop. Supply shortages have led to inflationary pressures that have not been seen in many years.

Central banks have reacted by attempting to stem demand by rapidly increasing interest rates. As rates have continued to rise, fears of slowing economies leading to a recession are becoming more prevalent. The massive accumulation of government, commercial and personal debt over the past few years will not be easily serviced in an environment of higher interest rates, constraining the abilities of debtors to respond to these challenging conditions. While markets have already receded, there is the possibility of further downside. Investors with medium to longer-term investment horizons will be drawn to companies with strong underlying fundamentals and management.

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TOP PICKS:

Manulife Financial (MFC TSX)

Manulife is a leading financial services group with operations in Canada, the U.S. and Asia. Asian sales have been impacted by the strict protocols with respect to COVID-19 that should diminish as restrictions ease. New accounting rules under IFRS 17 will be coming into effect in 2023 in the insurance industry which will add some complexity to analyzing financial reports. The company has a very strong capital position with which to exploit opportunities as they arise. At current levels, the valuation is very attractive with a price under book value and a yield of 5.5 per cent.

ARC Resources (ARX TSX)

ARC Resources is a Canadian exploration and production company with long life and low decline assets in northeastern British Columbia and central Alberta. Its current reserve book indicates a reserve life in excess of 14 years. Other locations indicate some 6,000 additional wells or more. This is a multi-decade, high-quality asset base. The recent decline in natural gas prices has resulted in an opportunity to purchase shares at around three times estimated cash flow with a 3.4 per cent yield.

BCE (BCE TSX)

BCE is Canada's largest communications and media company with operations in both wireless and wireline communications as well as Bell Media. BCE owns 37.5 per cent of MLSE. Ongoing capital expenditures have already increased fibre penetration and will continue to do so through 2025. Wireless operations have also been strong with increased roaming volume as pandemic restrictions have eased. BCE is well positioned to increase margins with improving operational efficiencies in both wireless and wireline. At current prices, the stock yields an attractive dividend yield of 5.8 per cent. The company has a history of annual dividend increases.

PAST PICKS: February 1, 2022

Bank of Nova Scotia (BNS TSX)

• Then: $92.24
• Now: $67.81
• Return: -26%
• Total Return: -23%

Alimentation Couche-Tard (ATD TSX)

• Then: $53.12
• Now: $62.13
• Return: 17%
• Total Return: 18%

Aecon Group (ARE TSX)

• Then: $17.81
• Now: $9.35
• Return: -48%
• Total Return: -45%

Total Return Average: -17%

BNN Bloomberg is owned by Bell Media, which is a division of BCE.