Aug 3, 2018

Peter Hodson's Top Picks: Aug. 3, 2018

BNN Bloomberg

Peter Hodson , BNN Bloomberg

Peter Hodson, founder and head of research at 5i Research
Focus: Canadian small and mid-cap stocks

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MARKET OUTLOOK

Well, once again, it looks like investors have worried too much. So far, corporate earnings for the second quarter have been quite solid, and guidance has generally been good as well. Sure, Facebook and Netflix missed earnings, but the less popular companies are doing just fine. Oh, and of course Alphabet and Amazon reported strong earnings too. Trade wars continue to be the main concern and, until these issues are settled one way or another, you should expect continued volatility.

But, if investors don't bid up the price of stocks, corporate takeover activity will. We've had bids for Aimia, AGT and Enercare in the past two weeks. This is in the middle of summer, when things are supposed to be slow. Expect a lot more takeover activity this fall when executives really get back to work. Valuations are OK, but more importantly, balance sheets (corporately) are solid, and even more importantly business confidence is returning. The economy is strong. There are more jobs available than workers looking for work in the U.S. This party will end one day, but with 4 per cent GDP growth, we likely have a few more good quarters or even a couple of good years left on pure economic momentum, if nothing else. You don't go from 4 per cent growth to recession overnight, so investors need to relax a little bit more.

TOP PICKS

5i Research doesn’t manage money, so no recent “purchases” are applicable.

COVALON TECHNOLOGIES (COV.V)

We like the management team and the high insider ownership position (45 per cent). It recently won a highly competitive bid for a $100 million contract, which has resulted in lots of inquiries to the company from potential new customers wondering how they won this deal. 5i Research is the first company to issue a report on the company, despite its big gains and $180 million market cap right now. Not risk free, but plenty of opportunities here.

SPIN MASTER (TOY.TO)

No matter what you throw at this company, such as competition or the bankruptcy of one of its largest customers (Toys ‘R’ Us), it just seems to deliver the goods, quarter after quarter. Second-quarter sales were ahead of estimates, and earnings look to start accelerating again. It has a very solid balance sheet and of course coming up is the big Christmas selling season. Management just knows their stuff here.

STINGRAY DIGITAL (RAYa.TO)

A recent takeover is 30 per cent accretive to income, but investors didn’t seem to like the deal and the stock is down 14 per cent this year. The company has a solid record of dividend increases and raised it in February. Revenue has grown every year since 2013 and earnings are set to accelerate. Investors view it as vulnerable to streaming, but it has a good base of business with 400 million users in 156 countries. All this for 13 times earnings.