Aug 9, 2016

Gerard Ferguson's Top Picks: August 9, 2016

BNN Bloomberg

Gerard Ferguson , BNN

Gerard Ferguson, Senior Portfolio Manager, Front Street Capital

FOCUS: Canadian Equities

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MARKET OUTLOOK:

Clearly the key issues in recent months have been the Brexit vote, the actions of the Fed, and the health of the U.S. economy.

Although markets have largely shaken off the results of Brexit and pushed higher, it is important to point out that the effects of the U.K.’s withdrawal from the EU on the global economy are yet to come. Our view is that the U.K. will likely leave the Eurozone, and that this will have a weakening effect on that nation’s economic growth profile. Fortunately, this slowdown will have a much more limited impact on global growth forecasts, but the greater risk lies in the contagion effects to other European countries (Spain, Portugal). We take relief in the orderly manner in which the results have been absorbed, and in fact, remain surprised with the markets’ ability to adjust to this unexpected change. This is in line with how the markets have dealt with recent macro events (Greece etc.).

Looking at the markets' preoccupation with the Fed, the looming risks of potential fallout from an immediate rate hike has probably been pushed out as far as December, given the increased levels of fear and the impending U.S. presidential election. One immediate impact was a significant rally (in essence, a continuation of the rally) in gold, and weakness across interest rate sensitive industries like banks, which will have to contend with miniscule net interest margins for a further six months at least.

And lastly, the U.S. economy continues to exhibit anemic, yet positive growth. As the recovery picks up steam they will have to deal with rising rates, but the improvement in employment, housing and consumer demand should offset the effects of those rising rates, and the market should transition to a focus on earnings growth, rather than simply pushing higher on rising multiples.

Top Picks:

Sleep Country Canada Holdings (ZZZ.TO), Most recent purchase price $21.00.

Sleep Country Canada continues to post impressive results. Same Store Sales growth remains above expectations (significantly so), company continues to grab market share from established players (Sears Canada), and recent M&A should shine a light on the space (U.S. player, Mattress Firm, being acquired by Steinhofff International)

Seven Generations Energy (VII.TO), Most recent purchase price $24.35.

Company continues to execute. Production and cash flow reported remains above expectations. The company continues to grow through the drill bit and now with acquisitions (Paramount transaction) are building an enviable position within the Montney area.

Shopify (SH.TO), Most recent purchase price $36.35.

Shopify reported last week again demonstrating very strong revenue growth (90 per cent year over year) pushing the stock to all-time highs. After a management luncheon post earnings, we believe the growth profile remains robust and with 300,000 merchants signed the company is in early innings of addressing its target market. We are also intrigued by the ‘Cash Advance’ business, although immaterial as of now, it’s very high margin business and could becoming a new growth vector for the company.