Paul Gardner is partner and portfolio manager at Avenue Investment Management. His focus is on large-cap dividend-paying stocks, REITs and fixed income.
Top Picks:
Timbercreek Senior Mortgage Investment Corporation (MTG TSX)
Invests in short-term mortgages secured by income producing properties. The dividend yield is 6.7% and this Mortgage Investment Corp (MIC) trades at a 5% discount to its NAV and is secured mostly by first mortgage origination. The Conservative loan to value is 44%. We believe that this issue trades too cheap to its NAV
Target (TGT NYSE)
Although retail is a very competitive sector. Avenue believes that Target will turn around its Canadian strategy. The stock has been hit hard due to its execution in Canada, as well as its security breaches from its credit card division. We believe on a historical basis, Target trades cheap to its sector. EV/EBITDA is 7.5x versus the industries 9.1x. Also, the company has a healthy FCF yield of 6%. We believe the shares should recover over the next year.
Tricon Capital (TCN TSX)
Invest primarily in US single family homes in hard hit areas from the 2008-2009 housing collapse. Acquisition of single family homes is still growing, along with their asset management business. With the recovery in US housing market the underlying portfolio value is getting more valuable. A catalyst for higher valuation might happen in late 2014 due to a securitization event that will enhance the company's liquidity and lower its funding costs.
Past Picks: July 2, 2013
Bank of America (BAC NYSE)
Then:$12.90; Now: $15.58; Total return: +21.09%
Mainstreet Equity (MEQ TSX)
Then: $33.39; Now $38.68; Total return: +15.84%
Tricon Capital Group (TCN TSX)
Then: $6.46; Now: $7.60; Total return: +21.44%
Total return average: +19.46%
Market outlook:
Both Equity and Bond markets have positively rallied through 2014. We believe that a small correction should occur in the summer of no more then 5-7% in both the Canadian and US stock markets. We believe the bond market will start discounting earlier then schedule monetary tightening from both Canada and US central banks. This adjustment towards higher rates (more in the short end of the yield curve) will be mild by historical standards. Inflation is still not the main concern. Deflation is still more of a threat to the global economic recovery. Avenue believes that the weather in the winter distorted many economic numbers and the "bounce back" from this historically bad winter will be forceful. The market should continue its positive tone over the next few years due to recovering global growth.