James Telfser, partner and portfolio manager at Aventine Asset Management 
Focus: North American stocks

MARKET OUTLOOK

Many of the key themes that have been in place since early 2019 are still present. Low interest rates, a sluggish global economy and accommodative central banks should continue to result in positive equity returns in the near term and keeping traditional fixed income allocations muted. Some of our strongest gains in 2019 came from our U.S. and Canadian dividend growth strategies, which remain overweight in our private client accounts in 2020. Given the total shareholder return available with large-cap dividend growth equities, there should be additional flow and valuation growth as pensions, individuals and institutions are challenged to find stable yield. 

Another key driver of our general market outlook and positioning for 2020 is that the risk of inflation seems mispriced, which should result in above-trend returns for certain asset classes. Demographics and productivity have shifted global growth lower, but fiscal stimulus and easy monetary policies have provided a positive backdrop for risk assets and equities. Central banks are trying to communicate to the market they’re willing to let inflation run above target. The costs of housing, healthcare and education have been increasing steadily and are essential for the middle class. As a result, we have been taking steps to protect against unexpected rises in inflation by increasing exposure to Treasury Inflation-Protected Securities (TIPS) as well as a modest allocation to gold in certain client accounts.

With this backdrop, we remain well invested in equities, focusing on companies with stable free cash flow, organic and inorganic growth opportunities, high returns on capital and dividend growth. Our fixed income allocations continue to focus on special situations in the perpetual preferred share and convertible bond market, high yield bond opportunities and inflation-protected securities. We continue to manage our cash level in the 5 to 10 per cent range depending on clients’ risk profiles.

TOP PICKS

AKUMIN INC (AKU/U TSX)

Akumin has been executing well on its business plan of acquiring and operating diagnostic imaging clinics in the U.S., primarily focusing on MRI and CT scans. They’re now the number 2 player in North America behind RadNet. Their business has several strong macroeconomic tailwinds, most notably demographics. Akumin should also benefit from operating leverage as they continue to scale. We expect strong volume growth as insurance companies encourage patients to utilize independent clinics versus the more expensive hospital centres. 

While growth has been robust (over 50 per cent on revenue in the last 12 months), we’re even more impressed with the margin profile at 20 per cent on EBTIDA and their ability to integrate new acquisitions. Given their execution to date, we believe that the current multiple of 5.5 times EV/EBITDA is far too low and out of line with the peer group and other consolidators. We consider this level to be an excellent entry point as the next phase of their business plan unfolds, resulting in even more organic growth and free cash flow.

FIRSTSERVICE CORP (FSV TSX)

FirstService is the largest property management company in North America and is also a leading provider of property services. The management team has a long history of demonstrating impressive capital allocation. We particularly like the fact that it has several levers to pull for growth, both organically and through acquisitions. Given the stock price weakness after their Q3 results, we believe it is an attractive time to add FirstService to both long- and short-term-oriented portfolios. 

The recent drawdown was driven on comparative weakness year-over-year from storm-related restoration work in the U.S. All other underlying business trends remain very strong. While their valuation is in-line with recent history, they’ve now corrected from elevated levels. It is not unreasonable to expect 5 to 10 per cent organic and 5 to 10 per cent acquisition-oriented growth, providing a very attractive return profile in a stable industry. 

BRISTOL-MYERS SQUIBB (BMY NYSE)

While we expect a certain level of noise surrounding healthcare stocks as we approach the U.S. election, we believe this company is well positioned to continue its impressive growth. The stock performed exceptionally well in the second half of 2019, driven by strong results from the Celgene acquisition. And yet the valuation remains attractive with a forward P/E of 10.8 times, well below the peer average. The stock yields 2.7 per cent and the dividend is consistently growing. Bristol-Myers has 15 per cent revenue growth, 40 per cent operating margins, a high level of free cash flow and strong macro tailwinds.

PAST PICKS: JULY 24, 2019

EMERA (EMA TSX)

• Then: $53.88
• Now: $59.71
• Return: 11%
• Total return: 13%

OPEN TEXT (OTEX TSX)

• Then: $57.51
• Now: $61.48
• Return: 7%
• Total return: 8%

GDI INTEGRATED FACILITIES SERVICES (GDI TSX)

• Then: $27.65
• Now: $33.57
• Return: 21%
• Total return: 21%

Total return average: 14%

TWITTER: @aventine_mgmt
WEBSITE: Aventine.ca