Paul Gardner’s Top Picks: September 22, 2022

Paul Gardner, Partner and Portfolio Manager, Avenue Investment Management

Focus: REITs, fixed income and dividend stocks

Market Outlook:

The year 2022 will remain challenging. The economic environment is tough, centered between out-of-control inflation and an almost certain recession. This makes it difficult to justify exorbitant valuations in the stock market due to higher interest rates and earnings estimates.

Avenue believes we will see continued downward pressure on S&P 500 earnings due to the massive consensus loaded up front from last year. The downward pressure also comes from labor and input price pressures due to labor market tightness and the recent supply chain issues we are facing globally. Also, the central banks may be about to slow the rate hike but they are not even close to ending the withdrawal of liquidity from the system.

We believe the bond market is now “safe” to enter. With most bonds now gaining more than four percent, we believe there is enough offset for future inflation risks. Over the medium term, we believe global economies will be more focused on the effects of future deflation rather than higher inflation.

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top picks:

Paul Gardner’s top picks

Paul Gardner, partner and portfolio manager at Avenue Investment Management, discusses his top picks: StorageVault Canada, Canadian Apartment REIT, and Nexus Industrial REIT.

StorageVault Canada (SVI TSX)

It has unique asset classes in real estate and warehousing facilities, which are not affected by the cyclical economy. In fact, it does the same or better in a recession because of people who either cannot sell their stuff or need to store their goods until they are sold. The self-storage business has proven to be a superior performer in the long run. Avenue believes earnings growth could double at a double-digit pace.

Canadian Apartment REIT (CAR.UN TSX)

Regardless of market performance, the apartment rental market is the place to be in real estate. Fundamentals are in good shape With apartment rents or replacement rents often rising (despite a myriad of rent controls), we feel this is the start of double-digit annual returns. The REIT is trading at a discount from NAV and its total balance sheet is in good shape. Additionally, the return on the REIT is a good 3.5 percent.

Nexus Industrial REIT (NXR.UN TSX)

Another asset that continues to do well during the pandemic is industrial real estate. Nexus is a small covert that grows and acquires Canadian industrial property. Rental margins are strong in the Ontario and Quebec markets. Nexus rental spreads offer future increases in their profit margins or cash flow, as maturities move to higher rental rates. The company has a unique relationship with a private property owner who develops and owns industrial properties across Canada.

Snapshots: Jan 12, 2021

Paul Gardner’s past picks

Paul Gardner, partner and portfolio manager at Avenue Investment Management, discusses his past choices: Leon’s Furniture, Boardwalk REIT, and WPT Industrial REIT.

Lyon Furniture (LNF TSX)

  • Then: $20.94
  • Now: $16.00
  • Yield: -24%
  • Total Return: -15%

Boardwalk Rate (BEI.UN TSX)

  • Then: $34.37
  • Now: $46.27
  • Yield: 35%
  • Total Return: 40%

WPT Industrial Fund (WIR-U TSX) (October 20, 2021, Blackstone REIT acquires the company)

  • Then: $15.14
  • October 19, 2021: $21.80
  • Yield: 44%
  • Total Return: 48%

Average total return: 24%

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