Jennifer Radman, vice president and senior portfolio manager at Caldwell Investment Management

Focus: U.S. large caps
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MARKET OUTLOOK
The main question/worry we hear from investors is: “Have we reached the market top?” 

It’s helpful to think back to all the events since the market started its recovery: flash-crash; double-dip recession; U.S. credit downgrade; taper tantrum; the ongoing European debt crisis (Greece); the Russian/Ukrainian conflict; Brexit; and Trump’s election — all scattered with an increased pace of terrorist activity. Each event heightened concerns of a market selloff, and yet markets continued to grind higher (the U.S. better than Canada).

It’s clear that calling a market top based on well-publicized events is a risky proposition. While a selloff at some point is inevitable, the timing and the magnitude are anyone’s guess. So while we won’t play the fool’s game of trying to “time” the market, there are things we are doing to position our clients for success.

Given elevated valuations and slower growing economies, over-diversified portfolios, which essentially give investors market exposure, won’t cut it. Unfortunately for Canadian investors, we see a lot of these over-diversified portfolios being offered by our peers. Our strategy, instead, is to run focused and differentiated portfolios that zone-in on specific opportunities rather than be exposed to broad-based market returns.

Our experience in Canada is a great example of this strategy at work. Our Canadian equity strategy (via the Caldwell Canadian Value Momentum Fund), has outperformed the TSX Total Return Index nearly five per cent annually over the last five years. That’s a significant amount of outperformance, and Caldwell is one of only five funds in the Canadian equity category to post a positive return in 2015, when the index was down 8.6 per cent.

Our active share (which measures how different we are from the market) and correlations (which measure the diversification benefits of owning this strategy) are amongst the best in our peer group. By running a concentrated portfolio (15 to 25 stocks) of companies with strong growth catalysts, we can achieve returns that are differentiated from the broader market. We think this is key given the current investing climate.

TOP PICKS

KEYSIGHT TECHNOLOGIES (KEYS.N)
About the company: Keysight is the world's largest electronic measurement company, providing hardware and software solutions that enable its customers to design, test and manufacture electronic products. They have market-leading, 20 per cent+ market share in the communications, aerospace/defence and industrial electronic verticals.

Investment thesis: The company was spun out of Agilent Technologies in 2014 where it acted as a cash cow and received little growth capital. After several years of flat growth, KEYS seems well positioned to benefit from the following secular growth trends:

1. 5G deployment: 5G is expected to be rolled out over the next few years as the rapid growth of connected devices and the increasing use of video streaming is driving demand for faster wireless systems.
2. Automotive/power: The trend towards intelligent/connected cars and power generation from renewable energy sources (battery power and wind power).
3. The move to software-based testing and management. KEYS has mission-critical offerings with high barriers to entry and 50 per cent recurring/repeat revenue. We believe KEYS' valuation discount to the broader market is unwarranted and expect shares to move higher as growth starts to accelerate.

SUNOPTA (SOY.TO)
About the company: SunOpta is a leading provider of organic and non-GMO consumer food and ingredients in North America. Customers include Kirkland (Costco’s private label), McDonald’s, Loblaw, Gerber, Cliff Bards, Frito Lay, Blue Diamond, Hain Celestial and Chobani. The business is a product of 30+ acquisitions since 1999 that were never effectively integrated, and recent operational missteps prompted the Board to conduct a strategic review of the business.

Investment thesis: We expect the share price to move meaningfully higher on the following:

1. New management: A new management team has been assembled that includes the appointment of a CEO who recently led a similar turnaround story at another food company. The CEO has brought in individuals who are motivated by opportunity and thrive on accountability and a high performance culture, and designed compensation packages that are aligned with targets set out in the company’s new value creation plan.
2. Better operations: The value creation plan involves a 40 per cent profit improvement through cost initiatives alone. We like opportunities where there’s an ability to grow the value of the business without needing a favourable external environment to do so.
3. Growing end markets: U.S. organic food sales grew 8.4 per cent in 2016, materially higher than the 0.6 per cent growth in the overall food industry. The growth runway remains attractive as organic accounts for only five per cent of total food sales despite growing consumer demand for healthier options.
4. Competitive advantage in an industry-leading supply chain: The supply of organic farms is limited and maintaining the integrity of the organic ingredients supply chain is not easy. Over the last 30 years, SunOpta has built the largest organic sourcing platform in the world and now sources ingredients from 65 countries. It has direct, long-standing relationships with organic farmers and often helps with the certification process (note that it takes three years for a farm to gain the organic certification).

TFI INTERNATIONAL (TFII.TO)
About the company: TFII is a leading transportation company in North America, operating in the truckload, package and courier, less-than-truckload and logistics industries. It generates 53 per cent of its revenue from Canada and another 46 per cent from the U.S. The company has a strong track record of growing shareholder value, both organically and through strategic acquisitions and asset monetizations.

Investment thesis:
After rising nearly 30 per cent following the announced acquisition of XPO's North American assets, a weaker-than-expected earnings report subsequently sent the stock back to pre-acquisition levels, wiping out all of its previous gains. Expectations at the time of the acquisition were for the trucking cycle to recover in late 2017; the expected recovery has now been delayed into 2018. Additionally, under-investment in the acquired company will lead to heightened expenses over the next few years, so the economics of the deal are not as favourable as originally thought. Having said that, the trucking recovery seems like a timing issue and, even after adjusting for higher costs, the deal remains very favourable to TFII shareholders. We believe the shares got ahead of themselves and expectations are now reset. Industry participants are cautiously optimistic that the trucking cycle has seen its bottom and management at TFII have shown a great ability to generate cash from acquired companies. Furthermore, TFII has considerable margin expansion opportunities as they improve operating efficiencies. We expect shares to resume moving higher as trucking weakness subsides and as the company begins to unlock value from recently-acquired assets.
 

PAST PICKS: AUGUST 10, 2016

TRICON CAPITAL (TCN.TO)

• Then: $9.45
• Now: $10.87
• Return: 15.02%
• Total Return: 17.97%

CGI GROUP (GIBa.TO)

• Then: $64.24
• Now: $62.71
• Return: -2.38%
• Total Return: -2.38%

STERIS (STE.N)

• Then: $71.40
• Now: $84.67
• Return: 18.58%
• Total Return: 20.46%

TOTAL RETURN AVERAGE: 12.01%