Robert McWhirter, president of Selective Asset Management Inc. 
FOCUS: Canadian Equities and Technology Stocks
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MARKET OUTLOOK
Six weeks ago our market comment looked at U.S. 10 year bond yields and noted “ Markets…will be watching closely to see if U.S. 10 year yields break out of their recent 2.12 per cent to 2.14 per cent trading range”.  On September 7th U.S. 10 year yields  set a new recent low at 2.03 per cent but are now back at  the top end of the trading range at 2.37 per cent.

Why have yields gone up? It may be due to an increase in demand for money for mortgages. Joe Farrell Head of Research at Velocity Trade Capital recently noted that XHB the S&P Homebuilders ETF has broken out of a multi-year trading range at US$40.31. He sees price upside for XHB to US$53.00 implying 31 per cent upside. Rising wages and inflation concerns may also be driving yields higher. Joe Kalish, chief macro strategist at Ned Davis Research Group recently noted at a presentation in Toronto that U.S. labour compensation is rising. A recent National Federation of Independent Business (NFIB) survey noted that hiring plans in the next 3 months are the highest in 10 years but the number of qualified applicants is the lowest in 18 years, causing wages to go up. Companies are substituting capital for more expensive labour as NFIB members’ capital expenditure plans are the strongest in 11 years.

Rising labour costs typically cut into profits but the potential 5 per cent reduction in U.S. corporate tax rates may provide relief giving further life to the equity market advance. We believe stocks are attractive relative to bonds and will continue to move higher over the next 12 months.

TOP PICKS

AVIGILON (AVO.TO) - $18.20 $800 million market cap
Avigilon manufactures and markets video surveillance and access control software and equipment. Year over year sales per share grew 18 per cent while year over year EBITDA per share  grew 119 per cent. Four quarter trailing free cash flow yield  swung to +3.8 per cent from -1.1 per cent a year ago. At 10.2 times enterprise value to 4 quarter trailing EBITDA (EV/EBITDA) the EV/EBITDA to year over year EBITTDA per share growth is an attractive 0.1 times. The median earnings estimate by 7 analysts  for cy 2018 is $1.19 versus $.94 last year. This 27 per cent forecast earnings growth rate gives a p/e of 15.3 times and an attractive  p/e to forecast earnings growth rate (PEG) of .56 times and a forecast return on equity of 16.9 per cent. Earnings growth of 26 per cent  is forecast for cy 2019. Joe Farrell Head of Research at Velocity Trade Capital at has a $25.00  target implying a potential upside of 50 per cent

MARTINREA (MRE.TO) - $12.10 $1.05 billion market cap
Designs and manufactures metal parts and assemblies and fluid management systems mainly for the automotive sector. Matrinrea uses Memex’s real time manufacturing software to significantly improve productivity. Martinres has a 1.1 per cent dividend yield which is a low 3 per cent of four quarter trailing cash flow. Martinrea trades at a modest 4.5 times enterprise value to four quarter trailing (EBITDA EV/EBITDA). EBITDA per share grew 16 per cent year over year which gives an attractive EV/EBITDA to EBITDA growth  ratio of 0.3 per cent  At .4 times EV to four quarter trailing sales and a 19.8 per cent forecast roe MRE’s shares appear attractive.

NORBORD (OSB.TO) - $48.89 $4.2 billion market cap
Norbord is the world’s largest producer of oriented strand board (OSB) with 17 plants in Canada, the US and Europe. Joe Farrell Head or Research at Velocity Trade Capital recently noted that XHB the S&P Homebuilders ETF has broken out of a multi-year trading range at US$40.31. He sees price upside for XHB to US$53.00 implying 31 per cent upside. We believe the breakout reflects the positive outlook for Norbord’s OSB products. Norbord has 4.2 per cent dividend yield which is a modest 9 per cent of four quarter trailing cash flow. Sales per share grew 24 per cent year over year while free cash flow per share grew 134 per cent year over year. Four quarter trailing free cash flow yield grew to 6.8 per cent from 4.1 per cent a year ago equal to $277 million of four quarter free cash flow. Year over year EBITDA grew 81 per cent giving an attractive 7.3 times EV/EBITDA ratio and an EV/EBITDA to yoy EBITDA per share  growth ratio of 0.1 times. Analysts have raised cy 2018 earnings estimates by 33 per cent in the last 90 days, combined with a 38 per cent trailing roe Norbord’s shares appear attractive.
 

Performance as of:

1 Month: 2.22% Fund, 3.62% Index*
1 Year: 8.35% Fund, 8.42% Index*
3 Year: 44.24% Fund, 11.73% Index*

Index: S&P/TSX TOTAL Return Index   (TSXTR)
* NOTE 3 year returns are simple returns (NOT compounded)
We out-performed the TSXTR by 3,251 basis points
* Identify if your fund’s returns are based on reinvested dividends. Returns provided must be net of fees! 
 

 TOP HOLDINGS AND WEIGHTINGS

1. MRE Martinrea 5.1%
2. OSB Norbord 4.9%
3. WCN Waste Connections 4.7%
4. CCO Cogeco Communications 4.7%
5. WFT West Fraser 4.7%

WEBSITE: www.selectiveasset.com