Robert Gill, senior vice president and portfolio manager at Goodreid Investment Counsel

FOCUS: Canadian large caps

MARKET OUTLOOK:

Berkshire Hathaway’s annual letter made for an entertaining read as always. Co-founder, chairman and CEO Warren Buffett began with a very fitting tribute to vice-chairman Charlie Munger, who passed late last year at 99. Buffett really credited Munger with being the architect of Berkshire Hathaway, while Warren was the general contractor. Specifically, Buffett credits Munger for convincing him to give up buying fair businesses at wonderful prices, and to focus on buying wonderful businesses at fair prices, and holding them for the long term and this is really what Berkshire Hathaway has come to be about.

In his letter, Buffett also touched on railways. He says that railroading is essential to the U.S.’ future. He likes rail because it’s the most efficient way to transport goods by cost, fuel use and carbon intensity, but as an investor, Buffett also likes the profitability of railroads and the returns they generate for investors. So in the U.S., the rail business is an oligopoly, its market is consolidated and not fragmented, but what about Canada? We have railways here too.

Canada has two publicly traded railways: Canadian National and Canadian Pacific. Two companies sharing an industry means that the industry is an oligopoly. While rails are ostensibly an oligopoly in America, Canada is truly the land of oligopolies! We have oligopolies in many sectors: rails, banks, airlines, grocers, and telecoms. The point here is that from the perspective of an investor, oligopolies are a good place to go hunting for investment ideas.

It’s not surprising then that over the long-term – 20 years - our Canadian oligopolies have outperformed their U.S. counterparts by giving investors a higher return. This is true of banks, telecoms and airlines. As a result, investors who are looking for higher returns should consider our Canadian oligopolies when they are constructing a portfolio.

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TOP PICKS:

CGI (GIB.A TSX)

CGI is a real success story. It is one of the largest information technology services company in the world, offering business consulting, system integration and IT outsourcing. Approximately 70 per cent of revenue is generated trough long-term contracts or governments. The company continues to grow organically and through acquisitions, meanwhile, valuation is reasonable.

Bank of Nova Scotia (BNS TSX)

This is the most international of Canada’s “Big 6” banks, with approximately 30 per cent of revenue coming from Central and South America. After lagging the rest of the Big Six banks in share price performance, BNS recently hired a new CEO, who has conducted a strategic review. The firm now has a mandate to reposition itself for greater growth. They will focus less on Latin America, and focus more on domestic banking and wealth management. Shares are attractively priced and pay a very impressive yield.

Alimentation Couche-Tard (ATD TSX)

Couche-Tard is a global leader in the gas station and convenience sector. It is geographically well-diversified with over 14,000 stores in 24 countries spread across Canada, the U.S., Europe and Asia. The company continues to grow impressively organically, and they continue to make value-additive acquisitions. ATD is well managed with impressive profitability and a strong balance sheet. Valuation is reasonable and there is a small dividend as well. We expect more good things to come from ATD.

PAST PICKS: FEBRUARY 1, 2023

Canadian Tire (CTC.A TSX)

Then: $163.97
Now: $138.31
Return: -16 per cent
Total Return: -12 per cent

TC Energy (TRP TSX)

Then: $54.11
Now: $53.73
Return: -0.7 per cent
Total Return: 7 per cent

Brookfield Corporation (BN TSX)

Then: $49.22
Now: $55.37
Return: 12 per cent
Total Return: 13 per cent

Total Return Average: 3 per cent