Peter Imhof, vice president and portfolio manager, AGF Investments
Focus: North American small caps

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MARKET OUTLOOK:

After a stellar 2016 relative to all other markets around the world, the TSX is taking a bit of a breather. The stock exchange is barely up year-to-date after the past two sessions. I’m still bullish on the Canadian market though, as we should see some very good results relative to last year in the upcoming quarters for the oil and gas sector.

I’m particularly excited about the small-cap market, as I’m seeing some great little companies performing extremely well in terms of earnings growth. The fact that correlations have broken down bodes well for stock pickers which in turn usually leads to better returns  in funds that have a bias towards small caps ( if those managers are adept at picking the winners from the losers). The larger pool of candidates to select from is an advantage when correlations break down.

I’m also quite excited about the pace of mergers and acquisitions in the small-cap space. It’s already seen a number of takeover offers in the early part of the year (RDM Corp, Tio Networks, Halogen Software, Milestone REIT). I would expect consolidation of smaller cap companies to continue for the rest of the year. 

TOP PICKS:

GRANDE WEST TRANSPORTATION (BUS.V)

Recently added to my position last week at $2.1. Was the lead order on a $1.90 financing a few weeks back

Grande West is a bus design and manufacturing company that’s at an inflection in terms of their growth. The company has recently announced a number of contracts and has firm orders for over 240 buses. I’d expect that number to continue to rise, as they’re bidding on other contracts that we should hear about in the next few months. We should see a material bump in order deliveries throughout the year.

The company has a clear advantage over competitors as they provide a cheaper, more fuel-efficient bus over what’s presently sold. Earnings should increase dramatically over the next couple of years. Only two analysts presently follow the company, but I’d expect more to come on board, as the market cap has crossed the $100-million mark and earnings should start to be material. 

YANGARRA RESOURCES (YGR.TO)

Recently purchased more at $2.40 last week

Yangarra is an oil and gas producer in west central Alberta. Its conservative management team has built a great little company that should show exceptional growth in 2017.

During most of 2016 the company decided not to drill, as oil prices were low. It focused instead on acquiring lands and working on their drilling techniques. Yangarra recently started drilling and have had some excellent results that opened the eyes of many market participants. Yangarra was only producing approximately 2,900 barrels of oil equivalent (BOE) last year and is already at 4,500 BOE.

The last few wells they’ve drilled have been explosive and we should hear over the coming months about other wells that were also recently drilled. Yangarra’s cash flow and production should move up dramatically in 2017 and will get on the radar screen of more fund managers. I consider it the go-to name in the small-cap space, as it will show better growth and cash flow versus any other small-cap oil and gas company that I’m aware of in Canada.

MAGELLAN AEROSPACE (MAL.TO)

Last purchase at $17 on Jan. 23

Magellan is a manufacturer of aerospace components and provider of related services. It’s a large supplier to Boeing, Airbus and military programs. 

The company’s stock is too cheap to ignore, but it’s usually ignored because of its lack of liquidity even though it has a billion-dollar market cap. The stock trades at an extremely low price-to-earnings (P/E) multiple of 10.5 times 2017 earnings despite the fact it’s grown its earnings at a 24-per-cent compound annual growth rate over the past few years. I don’t think it will grow at that same pace, but it’s too cheap to ignore.

If they get some liquidity into the name, the stock should rerate much higher. Murray Edwards currently owns 74 per cent of the company. The company has talked about looking for acquisitions which could be accretive if done with debt and would be well-received by the market.

 

Disclosure Personal Family Fund/Portfolio
BUS N N Y
YGR N N Y
MAL N N Y


PAST PICKS: JANUARY 8, 2016

BOYD GROUP (BYD_u.TO)

  • Then: $62.16
  • Now: $87.65
  • Return: +41.01%
  • TR: +42.09%

SKECHERS (SKX.N)

  • Then: $26.77
  • Now: $26.03
  • Return: -2.84%
  • TR: -2.84%

MILESTONE REIT (MST_u.TO)

  • Then: $14.86
  • Now: $21.63
  • Return: +45.63%
  • TR: +52.15%

TOTAL RETURN AVERAGE: +30.46%

 

Disclosure Personal Family Fund/Portfolio
BYD_u N N Y
SKX N N N
MST_u N N Y

FUND PROFILE: AGF CANADIAN GROWTH EQUITY CLASS

PERFORMANCE AS OF JAN. 31, 2017

  • 1 Month: Fund -0.8%, Index* 0.9%
  • 1 Year: Fund 20.1%, Index* 23.6%
  • 2 Year: Fund 7.0%, Index* 5.5%

* Index: S&P/TSX Composite

TOP HOLDINGS AND WEIGHTINGS: 

  1. Real Matters: 7.2%
  2. Parex Resources: 4.7%
  3. Royal Bank:  4.0%
  4. Bank of Nova Scotia: 3.6%
  5. Milestone Apartments  REIT: 3.0%

Website: agf.com