Fabrice Taylor, publisher of the President’s Club Investment Letter
Focus: Small- and mid-cap Canadian equities

MARKET OUTLOOK

It’s been very difficult for the past couple of years to make any money in the small-cap world unless you were gambling on pot stocks. I think the bloom is off that rose, what with the controversies at Aphria, Canopy and CannTrust, and we’ll therefore see money moving into other sectors. In terms of the bigger market, I think you have to worry a little bit about a world in which bonds have negative yields (that is, in which investors are willing to lose money lending to governments). I don’t know what omen that represents, but it can’t be good.

TOP PICKS

ALCANNA (CLIQ.TO)
Last bought in July at $5.60.

Alcanna operates liquor and cannabis stores primarily in Alberta. It’s the former Liquor Stores International income trust. Like most trusts, it over-distributed and neglected capital expenditures. Then, the oil price collapse hurt its Alberta retail operations even more.

New investors led by the Bitove family have taken over the company, with an added capital infusion from Aurora. So far, the numbers look bad, but there’s a reason for that: Alcanna has been keeping prices low to hurt and then acquire competitors, and it’s working. This aggressive approach hurts in the short term, but it creates a more stable pricing environment in the long term that will benefit shareholders.

IBI GROUP (IBG.TO)
Last bought in July for $5.15.

I recommended this engineering and construction company’s stock a few years ago as a turnaround and it quadrupled in short order, so it has tremendous leverage to slight improvements in business. The company has hit a speed bump since, but it’s starting to turn around again and yet it trades at a low multiple because investors are wary. If it can keep improving margins, the stock has good upside. Speaking more broadly and for the longer term, an investment in this stock is a bet on continued urbanization, which seems to be accelerating. That’s IBI Group’s speciality.

COLABOR GROUP (GCL.TO)
Last bought in June at $0.94.

Colabor distributes food and related items to restaurants and grocers in Eastern Canada. It also wholesales certain items. The company produces more than $1 billion of annual revenue and yet has a market cap of only $95 million. This is due to its earnings having been badly damaged by poor decisions in the past and by high debt. But the management team is now brand new, insiders have bought up almost a third of the shares over the past couple of years and there are signs of margin improvement. The company also recently sold an asset which will reduce debt by 20 per cent. The stock rallied on the news and I think there are more divestitures to be made, as well as more improvements. It’s a classic turnaround at just the right time, with the stock hitting fresh 52-week highs. I believe the price can multiply from here.

PAST PICKS: SEP. 7, 2018

MTY FOOD GROUP (MTY.TO)

• Then: $63.00
• Now: $66.81
• Return: 6%
• Total return: 7%

VERMILION ENERGY (VET.TO)

• Then: $41.25
• Now: $28.79
• Return: -30%
• Total return: -25%

AECON (ARE.TO)

• Then: $16.77
• Now: $19.25
• Return: 15%
• Total return: 18%

Total return average: 0%