Sep 27, 2016

Michael Decter's Top Picks: September 27, 2016

BNN Bloomberg

Michael Decter , BNN

Michael Decter, President and CEO, LDIC Inc.

Focus: Canadian large caps
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Market Outlook

We expect a better third quarter for the Canadian economy with the resumption of full production from the oil sands and record levels of oil exports by volume. It is too early to feel the effects of the promised infrastructure spending, but it likely to be a meaningful contributor to the Canadian economy in 2017.

We also expect continued growth in U.S. jobs and, probably by December or early 2017, a rate increase by the Federal Reserve. The Bank of Canada is not likely to increase rates in 2016 or 2017. Canada’s housing boom or bubble has been burst by low oil prices in Alberta and by a new tax in Vancouver, but Toronto housing continues to charge ahead. For how long is a mucky question.

Canada faces a major political challenge in determining whether there is the political will to build any pipelines in the face of determined, although not unified, opposition from environmental and Indigenous groups. For a federal government committed to rebuilding infrastructure, it is odd that oil by rail as the default choice would be acceptable.

We are in a lower-for-longer economic environment in terms of economic growth, interest rates and commodity prices. However, we expect a strong finish to 2016 in North American equity markets following the U.S. presidential election.

Top Picks

Mettrum Health (MT.V)

Mettrum has 16,000 patients and has established itself as one of, if not the, strongest medicinal players. Company has perhaps the best reputation amongst physician community.
Industry is growing at 10 per cent month-over-month and Mettrum is maintaining its market share of approximately 12 to 15 per cent.
Company is fully licensed at two facilities with limitless ability to increase capacity.
Running at 70 per cent gross margins.
Cash of over $30 million.
Well positioned to participate in recreational market, which is expected to be rolled out next year.
Company has a market cap of $150 million versus Canopy at $460 million, despite Canopy having 2,000 patients and similar operating metrics to Mettrum.
Aphria has half the patients and twice the market cap.
Handful of other new entrants with a fraction of the business of MT also trade at $150 million market cap.
Massive valuation discrepancy between MT and the other players.
Starting to think this space if getting a bit ahead of itself, but Mettrum continues to look like exceptional value and the best way to play the space.

Clearwater Seafoods (CLR.TO)

Own virtual monopoly in shellfish quota in Atlantic Canada.
Supply of shellfish is limited as governments look to maintain sustainable fisheries and because you can’t farm shellfish, for the most part.
Demand is robust amongst premium end of developed markets and amongst emerging markets, particularly China.
Limited supply and strong demand are driving higher prices, which is creating margin expansion for CLR.
Recent acquisition in U.K. diversified the business into new waters and complementary products and is highly synergistic.
EBITDA has gone from 50 in 2010 to 150 expected in 2017 under new management and we believe they can get to 200M over the near-term with additional M&A.
Expect very strong back half of 2016.

AGT Food and Ingredients (AGT.TO)

Demand for pulse products is very strong globally from emerging markets, developed markets and food aid programs.
Supply has been all but nil as we are sold out of last year’s crop.
This year’s crop harvest is a record breaker, with decent quality and harvested to meet pent up demand.
Incoming supply and pent-up demand creates strong visibility into back half of year and we expect two very strong quarters starting in Q3.
Big crop also lowering lentil prices, which will allow the company to extract working capital and increase free cash flow to pay down debt.
Company has moved into further value-added processing in the food-ingredient segment by making pulse-based ingredients.
Expect company to penetrate human food market over the coming months, which will be a further catalyst to margin expansion.

Disclosure	Personal	Family	Portfolio/Fund
MT	Y	Y	Y
CLR	Y	Y	Y
AGT	Y	Y	Y

Past Picks: October 22, 2015

Cineplex Entertainment (CGX.TO)

Then: $50.00
Now: $50.57
Return: +1.14%
TR: +4.12%

IMAX (IMAX.N)

Then: $37.59
Now: $29.58
Return: -21.32%
TR: -21.32%

Walt Disney (DIS.N)

Then: $113.25
Now: $91.65
Return: -19.08%
TR: -17.97%

Total Return Average: -11.72%

Disclosure	Personal	Family	Portfolio/Fund
CGX	Y	Y	Y
IMAX	Y	Y	N
DIS	Y	Y	Y

Fund Profile: LDIC North American Small Business Fund
The Fund invests in a diversified portfolio of small capitalization companies in North America, through debt and equity securities, with an objective to achieve long-term capital appreciation. The manager combines a “top-down” and “bottom-up” approach to the investment process. The “top-down” approach uncovers broad investment themes with the potential for growth. The “bottom-up” analysis utilizes deep quantitative and qualitative due diligence to generate specific investment ideas in high-quality companies with strong or improving fundamentals and with material long-term growth prospects.

Performance as of August 31, 2016:

1 month: Fund 3.37%, Index* -1.82%
1 year: Fund 18.83%, Index* 18.24%
YTD: Fund 16.43%, Index* 22.56%

* Index: 70% S&P/TSX small cap total return index / 30% Russell 2000.
* Identify if your fund’s returns are based on reinvested dividends. Returns provided must be net of fees!