Jeff Young is co-CEO and CIO at NexGen Financial. His focus is on Canadian dividend stocks.
Top Picks:
Peyto Exploration & Development (PEY TSX)
Peyto is a high quality, 78,000 Boe/day, natural gas producer in the Alberta deep basin with strong production per share growth. The company is a low cost producer with a concentrated asset base and strong record of good capital allocation decisions. The company's shares have pulled back recently on concerns over low natural gas prices given the colder than average North American summer. Despite the cold summer and high levels drilling in the U.S., natural gas storage looks set to exit the injection season well below average levels leading to the potential for strong gas prices this winter and a rebound in sentiment for natural gas company stock prices, including PEY.
Manulife (MFC TSX)
While the company missed analyst expectations for the second quarter, they remain on track to meet their earnings target of $4-billion by 2016. The company raised its dividend 19 per cent which is a clear indication that management is feeling confident in their capital levels and earnings prospects going forward. With an improving economic environment, an expectation of low teens earnings growth, and a reasonable valuation we believe Manulife has good total return prospects going forward.
Cardinal Energy (CJ TSX)
Cardinal is 6,500 Boe/day oil focused producer with mature, low decline, assets in south east and east central Alberta. The company has made three major acquisitions since 2012 and with no net debt and a 13-per-cent decline rate the company is well suited for a yield plus growth model. The company operates 97 per cent of its properties with a high working interest and has a multi-year drilling inventory. We expect the company to continue to acquire assets accretively and to deliver above peer group production per share growth in 2015 without incurring any debt, while simultaneously rewarding shareholders with continued dividend growth.
Past Picks: September 19, 2013
Gibson Energy (GEI TSX)
Then: $24.05; Now: $35.74 +48.61%; Total return: +54.78%
Arc Resources (ARX TSX)
Then: $26.18; Now: $31.46 +20.17%; Total return: +24.72%
H&R REIT (HR.UN TSX)
Then: $21.44; Now: $23.38 +9.05%; Total return: +15.33%
Total return average: +31.61%
Disclosure: | Personal | Family | Portfolio/Fund |
GEI | N | N | Y |
ARC | N | N | Y |
HR.UN | N | N | N |
Market outlook:
The equity indexes are arguably overdue for a correction, however we remain generally constructive on stocks into year-end. While the lift in markets last year was predominately attributable to multiple expansions, this year it is encouraging to see earnings growth as a key driver of returns. We expect Canadian equity performance to continue playing catch up after the large U.S. equity outperformance of last year. Assuming the economic recovery continues to unfold globally, we would expect economically sensitive and commodity oriented stocks to gain traction with investors as the economic cycle matures.