Michael Sprung, president, Sprung Investment Management

FOCUS: Canadian large cap stocks 

MARKET OUTLOOK:

Rising yields are having a negative impact on capital markets as future cash flows get discounted at higher hurdle rates. International geopolitical tensions continue to escalate, while political polarization pervades domestic markets. In the United States, the 2024 presidential election will further exacerbate this polarization. As the cost of debt service rises, consumers, governments and businesses will struggle to keep budgets under control. Supply chains continue to adjust to a post-pandemic, security-conscious world. All of these factors are contributing to a volatile and more pessimistic economic outlook. Investors are advised to concentrate on investments with strong fundamental characteristics such as manageable debt, less volatile revenues and earnings and more secure industry presence.

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TOP PICKS:

Bank of Nova Scotia (BNS TSX)

The Bank of Nova Scotia in the fourth largest bank in Canada by market capitalization. Increasing interest rates led to concerns regarding the credit quality of bank loans and mortgages negatively impacting the prices of stocks. Scott Thomas, the new CEO for BNS, is undertaking a strategic review of the bank’s capital allocation priorities that should lead to higher profitability in various business lines. At current prices, the stock is trading close to book value and yielding around 7.3 per cent.

Newmont (NGT TSX)

Newmont Corporation is one of the world’s largest gold companies with exposure to copper, silver, lead and zinc as well as gold. On Oct. 13, shareholders will vote on the US$16.8 billion purchase of Newcrest Mining (NCM-AX) in a share exchange of 0.4 Newmont shares for each Newcrest share. The combined company will primarily operate in Tier 1 low-risk mining jurisdictions. Newmont will have significantly more copper exposure in Canada and Australia. Management estimates that there will be $500 million in synergies and $2 billion in cash improvements in the first two years of the combined entity. Approval for the combination has already been received from Papua New Guinea and management realignments have been announced. In the current environment and with the prospect of needed materials in the energy transition, Newmont looks attractive. The current price indicates a yield on the stock of 4.4 per cent.

ATCO (ACO.X TSX)

ATCO Ltd. is a global conglomerate which owns and operates energy infrastructure assets. The company has operations in three primary business segments: Canadian Utilities (53 per cent owned, 82 per cent of earnings); Structures and Logistics (100 per cent owned, 14 per cent of earnings); Neltume Ports (40 per cent owned, four per cent of earnings) and Corporate (100 per cent owned, includes Real Estate and ASHCOR. The company has a history of sound multi-generational leadership. ATCO has raised its dividend every year for the last 30 years. At current levels, the stock yields around 5.5 per cent.