On November 19, The Wall Street Transcript interviewed Neil Wickham, President of Wickham Investment Counsel Inc., on investing in Canadian stocks. Key excerpts, including his stock picks, follow:
TWST: Would you describe your asset allocations, strategies, and describe the investment process? What type of equities are you looking for?
Mr. Wickham: In Canada, there are probably three or four sectors that are very good to be in right now, especially if you choose the better companies in those sectors. One of the sectors that we like particularly is oil and gas, for obvious reasons. We have for some time felt that the price of crude oil was going to continue to rise and we've been right. I don't see any reason for that trend to change. We like oil and gas, and we like base metals. We think the growth in China is going to support a strong base metals market for another several years. I'm not sure how long, four, five, six, 10; I'm not sure that's going to be strong, so we like to be in the best base metal companies. The two that we like the most are in the big cap category. They are not big by US standards, but they are big by Canadian standards. These are Teck Cominco (TCK) and HudBay Minerals (HBMFF.PK). Those are two of the ones that we like in that sector.
In the oil and gas sector, we like all kinds of companies, but the ones that have the best play on continually rising commodity prices over the long term would be the ones that are heavily into oil sands projects where the reserves are very long term, 40, 50 or 60 years or more. In this area, we like Petrobank [PBG:TSX], Suncor (SU), which is a straight play on the oil sands, and Canadian Oil Sands Trust [COS_UN:TSX], which is an income trust that will have to decide about their business structure on a long-term basis. They haven't made any announcement yet, whether they are going to stay an income trust after 2011 or convert to some other format. Again, they have very long reserves, good steady production, and the reserves in the ground keep going up in value as the price of the crude oil keeps going up. That's a hard thing to beat. We like oil and gas, and metals.
In Canada, of course we have a very strong banking sector and we have a number of very strong life insurance companies as well. We like to be in those businesses. In the banking sector we like Toronto-Dominion (TD), and we like RBC Financial (RY). In the life insurance sector, we like Manulife (MFC). These companies are also listed on the NYSE as well as Toronto, so US residents can buy them just as easily as we can. In the life insurance sector, Manulife and Sun Life Financial (SLF) are good. We have a couple of large mutual fund management companies, and those are pretty good too. The one we like best is CI Financial (OTC:CIXUF), which is a large mutual fund management company. In the financial group, there is a lot to like in Canada and those are some of our favorites.
We also have a number of very strong Canadian retail franchises that are continuing to do exceptionally well and we like a number of these. My favorite of them all is Gildan Activewear (GIL), which is a manufacturer of underwear, socks, sweatshirts and T-shirts. It started off as a small Montreal company that has grown rapidly and is now a Montreal head office company with production facilities in Honduras and Dominican Republic. They ship from those ultra modern and efficient plants around the world. With a couple of acquisitions they have made over the last year, they have now just started selling socks, underwear, and sweatshirts into the major chain stores in the United States, like Wal-Mart (WMT), Kmart and so on. They've got a lot of room for growth. Their earnings guidance for 2008 is a 42% increase in earnings. They always beat their guidance and that guidance was before their latest acquisition, which is accretive. It's a very, very strong company and one that we think very highly of. That's in the consumer goods area. In straight retail, our best drug store chain in Canada is Shoppers Drug Mart [SC:TSX] and it continues to rack up 15% to 20% growth in earnings per year, maybe even a little over 20% in the odd quarter. We see that kind of growth going forward, so we like to be in Shoppers Drug Mart. It is a play on both the retail and the favorable age demographic that we see over the next 20 years. Another retailer that has a great franchise is Tim Hortons (THI), which is Canada's favorite coffee and doughnut shop. It used to be owned by Wendy's (WEN), as you may recall. Tim Hortons is also racking up very strong quarterly earnings gains and we see it producing earnings growth in the 12% to 15% area each year for as far out you can see. It's an extremely well run company and we like it. We hold it in a lot of accounts.
The last one, which is one not familiar to many US residents is a company called Canadian Tire [CTC.A:TSX], which is a diversified retailer. In its early years it was focused on auto parts and auto-related stuff. Over time, it morphed away from those things into a variety of other things, including a Mark's Work Wearhouse chain that is now producing exceptionally good results. They also started their own banking system that is now accounting for nearly 40% of their profits. From an early auto parts peddler to a diversified retailer and a financial system, they're doing extremely well. Again, this company is producing earnings gains quarter-over-quarter of 12% to 17% and should continue to do that for as far out you can see. They are well managed, with a good plan, good cash flow, all the things that you like to see in a growth stock, and all the things you like to see as a value stock. Value with growth is a good combination.