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Top Picks from Bruce Campbell: Enercare, iShares MSCI Europe IMI Index ETF and Element Financial

Tags: Market Call

Bruce Campbell, president and portfolio manager, Campbell, Lee & Ross

Focus: Canadian Large Caps

MARKET OUTLOOK:

A volatile January in which the TSX briefly touched 11,500 on January 20 was followed by a two week relief rally. However, the volatility returned in the second week of February as the TSX briefly dipped under 12,000. Since that time, the tone has changed with the market moving up, closing February at 12,860. The positive tone has extended nicely into March. A lot of the strength can be attributed to higher oil prices and central bank actions. This started as a short-covering rally, but now the question is whether it can turn into a sustained rally? Note that most rallies begin with short-covering activity so it is not necessarily a given. In fact, there are no easy ways to delineate bear-market rallies and cyclical bull markets. In both 1998 and 2011, the 50-week TSX moving average (MA) was the bear-bull line following these non-recessionary periods. A bear-market view would imply we are in a trading range in which equities exposure should be reduced as the TSX closes on approximately 13,800. However, a push above this level could signal a cyclical bull market in Canadian equities. The surge in market breadth on the TSX has been very encouraging with 83 percent of stocks now trading above their 50-day MA. This is the highest percentage on record. This kind of burst in breadth can point to stocks being overbought in the short-term, it could also mark a positive change in sentiment towards commodity-centric Canada. We may due for a pause and we are selective buyers on weakness.

Top Picks:

Enercare (ECI.TO)

Enercare (formerly Consumers Waterheater). It is a fast growing company in the business of sales/rentals of water heaters, HVAC units and submetering installations. Although the business is traditionally stable and predictable, it has had tremendous success growing. Its latest acquisition of Service Experts, which is a similar (although smaller) U.S. based competitor, has a lot of potential for organic growth. The purchase price was US$340 million and it is expected to be 25 percent accretive to 2016 distributable cash flow per share. It also lowers the payout ratio from 82 percent to 70 percent, which helps support the company’s current dividend of about 5.5 percent. Management sees substantial growth opportunities through integrating their own financing/rental business into the Service Experts current customer base. Currently Enercare rents 1.1 million units to customers, while Service experts rents zero. The rental business is the most profitable aspect of the business for Enercare. Pro forma the acquisition, it is expecting a 98 percent increase in revenue and a 16 percent increase in EBITDA. The company raised both equity and debt to finance the acquisition so we used the weakness created by the equity raise to buy the stock.

iShares MSCI Europe IMI Index ETF (CAD-Hedged) (XEH.TO)

The XEH is a European-centric Exchange Traded Fund (ETF) that is well diversified by geography, sector and security. It is hedged against the Canadian dollar, so it will benefit from the growth resulting from the ECB’s stimulus strategy but will not be affected by a weakening of the euro due to the negative interest rate monetary policy in Europe. The biggest country weights are the U.K. (30 percent), France (14 percent), Switzerland (14 percent), Germany (13 percent) and Sweden (5 percent). From a sector and security weighting perspective, the top five sectors are Financials (HSBC), Consumer Staples (Nestle, BAT & Anheuser Busch), Industrials, Health Care (Roche, Novartis, GlaxoSmithKline and Sanofi) and Consumer Discretionary. It also holds some interesting international Energy companies such as TOTAL and Royal Dutch Shell. Recent purchases around $20.

Element Financial (EFN.TO)

Element recently announced its intention to split into two separate publicly traded entities: one focused on fleet management, the other, a commercial asset management company. This was viewed as a positive and the stock has moved but it still trades less than 10x earnings. Further, while the fleet business contributes the bulk of the value, we think there is a wide range of values that could be ascribed to the tax benefit and commercial asset management business, likely resulting in a gap between its underlying fundamental value and what value investors will initially ascribe. Investors should focus on a sum-of-the-parts valuation which would result in a one-year target of $20. The split should occur in the fall and as this approaches, the stock should start to further reflect the underlying values.

Disclosure:

Personal

Family

Portfolio/Fund

ECI

Y

N

Y

XEH

Y

N

Y

EFN

Y

N

Y


Past Picks: March 16, 2015

Alimentation Couche-Tard (ATDb.TO)
Still lots of targets in the U.S. and Europe so we see at least another 2-3 years of acquisitions and growth and the stock heading towards the $70 level.

  • Then: $48.13
  • Now: $60.19
  • Return: +25.05%
  • TR: +25.53%

Nike (NKE.N) *Stock Split on December 24, 2015 – 2 for 1 *

Sold the stock after it reached $63 after a stellar quarter, just felt the valuation at almost 30x earnings was too high.

  • Then: $96.44
  • Now: $61.47
  • Return: +27.48%
  • TR: +28.80%

Merck & Co. (MRK.N)
Still hold, good organic growth coming over the next few years with a below-average multiple, still holding.

  • Then: $57.12
  • Now: $52.40
  • Return: +8.26%
  • TR: -5.13%

Total Return Average: +16.40%

Disclosure:

Personal

Family

Portfolio/Fund

ATDb

Y

N

Y

NKE

N

N

N

MRK

Y

N

Y

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