Fabrice Taylor, publisher at The President’s Club Investment Letter

Focus: North American equities
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MARKET OUTLOOK
We’ve gone eight years without a major correction, so we’re due. I think investors should bear that in mind and stay liquid, meaning have lots of cash on hand. If you have cash on hand, a major correction becomes an opportunity rather than a catastrophe. That doesn’t mean you can’t keep investing, but I would stick to bottom-up ideas. Elsewhere, the Trump effect is likely real and his stimulus spending and tax cuts may prop up valuations, but if rates keep rising there’s trouble to be had in most pockets of the market.

TOP PICKS

COLABOR GROUP (GCL.TO) is a classic turnaround idea. It’s a boring old business (food distribution) that fell on hard times as a result of rapid expansion and too much debt. While revenues ballooned, margins were eroded and the balance sheet became stretched. What was once an $11 stock was reduced to penny-stock status. But very recently, the company completed a rights issue that raised a large amount of cash, which cleaned the balance sheet. A 25-year veteran of the food distribution business invested $5.5 million in the rights issue and joined the board in an executive role. And the company has already produced two straight quarters of margin expansion. This could be a $3 to $4 stock in two to three years, maybe more. I last bought shares in October for $1.01.

BADGER DAYLIGHTING (BAD.TO) builds and operates a fleet of hydrovac trucks, which are used to dig holes and trenches using high water pressure. This technique, which they pretty much invented, is catching on across North America because it’s safer and more economical overall than using a backhoe, especially around existing pipes and underground cables. The reason for this call is a short squeeze. A little more than a quarter of the company’s shares are sold short, while 75 per cent of the stock is owned by institutions who are holding for the long term. I think the short argument is weak at best and dishonest at worst. With an improving energy market, which accounts for about 40 per cent of Badger’s business, my bet is a short squeeze will force hedge funds to buy back the stock to cover. I can see this stock going to $40. I last bought it this week at $32.

CEAPRO (CZO.V) is a profitable biotech company that produces compounds from oats and other grains, notably the main active ingredient in Aveeno’s cream, which gives the product its anti-itch properties. Ceapro is profitable and cheap, quoted at 12 times earnings. It also has massive upside. Sales in the first nine months of this year were more than 55 per cent higher than last year and operating profit was more than 200 per cent higher. Gross margins are twice as big as Apple’s at 70 per cent. There are three sources of upside: continued growth of the company’s existing proprietary compounds, which will come at little cost because Ceapro just built a state-of-the-art plant that can do 10 times current revenue with no additional capex; new compounds it may find a way to extract using its technology; and a clinical trial to test an oat-based treatment for high cholesterol, which will multiply the stock price if successful. Bottom line is massive upside and little downside. I last bought shares last week for $1.40.
 

PAST PICKS: OCTOBER 8, 2015

POLARIS INFRASTRUCTURE (PIF.TO) shares performed because the market finally recognized the rich cash flow produced by the company’s thermal energy plant. With the dividend, which is priced in U.S. dollars, the return is about 10 percentage points better. They’ve raised it and I think they can do so again and again as they drill more holes and expand their operations. The payout ratio is about 50 per cent, so there is room to increase the yield.

• Then: $10.60
• Now: $15.10
• Return: +42.45%
• TR: +47.87%

NUVO PHARMACEUTICALS (NRI.TO) is a volatile stock because it’s a one-product company and sales are lumpy. The stock recently sold off as sales of its flagship Pensaid drug disappointed in the latest quarter. If they don’t bounce back the stock price will be under pressure, but the company has a lot of cash for M&A and Pensaid could be approved for other uses, so there is still upside.

• Then: $7.01
• Now: $5.69
• Return: +18.06%
• TR: +18.06%

On March 7, 2016, Nuvo Pharmaceuticals produced a spin-off company, Crescita Therapeutics Inc. The price of Crescita’s shares are included in the overall $7.01 price of Nuvo Pharmaceuticals.

ISHARES S&P TSX CAPPED ENERGY INDEX FUND (XEG.TO) is an oil-and-gas ETF. This was a call on a bounce in the sector, which we seem to be finally getting with help from OPEC. There is a lot of doubt about the cartel holding to these announced cuts, but there comes a point when an industry gets tired of losing money or not making as much as it could, so I think they will be disciplined, especially if Russia plays along.

• Then: $12.32
• Now: $14.11
• Return: +14.52%
• TR: +17.01%

TOTAL RETURN AVERAGE: +27.64%
 

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