Top picks from the pros
1| Brookfield Asset Management (TSX: BAM.A)
Market cap: $24 bil | P/E: 19.3
This Toronto-based holding company is a perennial favourite among managers, and it’s easy to see why. It owns commercial properties, utilities and infrastructure around the world that will be spinning off cash for decades. Management’s goal is to compound net asset value by 12% year, and so far it’s been able to do that. Kedwell likes how it makes money, too: it collects recurring fees like rents, tolls and utility bills, and it also charges its investment partners a fee to manage the assets. Brookfield typically funds 35% to 60% of a new asset purchases with debt, he adds, but it’s such a cash cow that its balance sheet isn’t an issue.
2| Bank of Nova Scotia (TSX: BNS)
Market cap: $69 bil | P/E: 12.2
It’s hard to go wrong with Canadian banks, but that doesn’t mean you should just pick one and be happy. For Kedwell, growth is key. That’s why he likes Toronto-based Scotiabank. Over the past five years, the company has moved into Latin America, for both banking and wealth management, which helps counteract slow growth in Canada. He also thinks its August 2012 purchase of ING Direct was a wise move. “They paid a reasonable price for it too,” he says. This is a business that can compound at 10% per year, and it’s growing earnings about three percentage points faster annually than some other banks, he says. Kedwell also expects its 4% yield to grow.
3| Canadian Natural Resources (TSX: CNQ)
Market cap: $34 bil | P/E: 19.1
This Calgary-based oil and gas producer is the only one of Kedwell’s three picks “where some degree of negativity is priced into it,” he says. That’s thanks to the price differential between Canadian heavy oil and benchmark crude prices. That difference, which peaked above $40 at the end of last year but has returned to a more normal $20 gap, has affected valuations and share prices. CNQ is trading at about a 20% discount, “as if these differentials will persist almost forever,” he says. Should the price gap stay where it is, the firm should see 15%–20% earnings growth per year. The performance of its Horizons Oil Sands project is improving too.
Kedwell’s Funds: RBC North American Value Fund
10.2% 10-year annualized return
TOP 5 HOLDINGS
Suncor Energy: 3.0%
Toronto-Dominion Bank: 3.0%
Berkshire Hathaway, Class B: 2.5%
Bank of Nova Scotia: 2.4%
Potash Corp. of Sask.: 2.0%
PH&N Canadian Equity Value Fund
6.1% 3-year annualized return
$326 Million Total assets