Jennifer Radman, vice president and senior portfolio manager at Caldwell Investment Management 
FOCUS: U.S. large caps
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MARKET OUTLOOK

Canadian and U.S. markets have continued to grind higher despite investor fears that markets will correct. This is just the latest in a string of examples of how difficult it is to time a market, especially when fears are driven by headlines and geo-political concerns. Most U.S. companies have now reported third quarter results, with a higher percentage beating expectations on both the top and bottom lines than in prior quarters. However, the market’s reaction to ‘beats’ has become more muted, while the reaction to ‘misses’ has strengthened. In today’s low growth and higher valuation world, we continue to recommend investment strategies that own fewer stocks targeted at specific companies or areas of the market, versus strategies that closely resemble the broader markets. Companies benefiting from strong secular trends or that have company-specific levers to drive value creation (i.e. things that are within management’s control as opposed to having to rely on economic growth or a continued market rally) are our focus. 

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/defense 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:

• 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.
• Automotive/power: the trend towards intelligent/connected cars, and power generation from renewable energy sources (battery power and wind power).
• 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. 

LCI INDUSTRIES (LCII.N)

About the company: LCI Industries is a leading supplier to RV OEMs where it holds #1 or #2 market share positions in its product lines. It is also a supplier to the manufactured housing and marine industries (18% of sales) and has an aftermarket business (8% of sales). LCI generates 98% of revenue in the U.S.

Investment thesis:

1. Strong RV demand: RV units are on track to grow 11.5 per cent over 2016. Strong demand is being driven by several factors, including demographic tailwinds from aging baby boomers and stronger interest from millennials.
2. Incremental growth opportunity: LCI has identified US$4 billion in revenue opportunity, which provides a long growth runway given the company currently generates US$1.8 billion in revenue. The company sees revenue growth of US$200 to US$400 million per year over the next three to five years as it increases its content/RV, expands into adjacent industries, expands internationally, grows its aftermarket business and targets appliances and electronics. LCI has shown strong execution in these areas already. For example, content per vehicle has doubled in the last 10 years and aftermarket and international revenues have doubled in the last few years.
3. Strong barriers to entry: LCI has very strong relationships with its key customers given its strong innovation focus. The company outspends its competitors on innovation and has unmatched product breadth. This has translated into double-digit return on equity (ROE) over the cycle.
4. Valuation appears attractive on peak cycle fears: Investors seem very much fixated on the U.S. RV market and when the cycle will top. However, management noted that US$2.2 billion of the US$4 billion identified opportunity is outside of the U.S. RV market. Additionally, investors seem to be anchoring to the 08/09 downturn, which was rather harsh. Looking at prior cycles, declines are more reasonable and management expects to be able to offset industry-driven declines with these other opportunities. With an excellent balance sheet (only US$12 million in net debt) and cash flow that should inflect positively going forward, we believe LCI is an attractive opportunity for investors. 

TYSON FOODS (TSN.N)

About the company: TSN is the largest diversified protein company, fully integrated chicken producer and beef processor, and third-largest pork processor in the U.S. It is also now one of the largest prepared meats producers following its acquisition of Hillshire Brands in 2014. TSN generates 98 per cent of revenue in the U.S.

Investment thesis:

1. Moving up the value spectrum: TSN has done a very good job of transitioning its business away from commoditized products, which generate lower margins and higher earnings volatility, and into higher value add product. Today, an estimated 65 per cent of their operating profit comes from value-add products; as margins increase and earnings become smoother and more predictable, the stock's valuation multiple should continue to expand.
2. Playing into consumer trends: Protein fundamentals remain strong and consumers are increasingly demanding high-quality food in convenient “on-the-go” packaging. This plays into TSN's move into higher value products.
3. Synergies from the APFH acquisition: TSN acquired AdvancePierre Foods in early 2017. The company is a leading national producer and distributor of ready-to-eat sandwiches and other snacks to foodservice, retail and convenience stores. The acquisition provides significant cost and cross-sell opportunities.
4. Strong competitive position: With leading or very strong market share in every segment in which they operate, Tyson's extensive expertise and considerable scale advantage act as large barriers to entry.

PAST PICKS: JANUARY 17, 2017

APOGEE ENTERPRISES (APOG.O)

• Then: $55.56
• Now: $47.33
• Return: -14.81%
• Total return: -13.90%

CARDINAL HEALTH (CAH.N)

• Then: $75.18
• Now: $60.82
• Return: -19.09%
• Total return: -17.60%

TRICON CAPITAL GROUP (TCN.TO)

• Then: $9.73
• Now: $10.75
• Return: 10.48%
• Total return: 12.46%

TOTAL RETURN AVERAGE: -6.34%

FUND PROFILE
Caldwell Canadian Value Momentum Fund
Performance as of: October 31, 2017

1 Year: 14.8% fund, 11.5% index
3 Year: 12.8% fund, 6.2% index
5 Year: 13.6% fund, 8.4% index

*Index: S&P/TSX Total Return Index

TOP HOLDINGS AND WEIGHTINGS

1. CGI Group: 5.9%
2. New Flyer Industries: 5.7%
3. Imvescor Restaurant Group: 5.6%

WEBSITE: www.caldwellinvestment.ca