Veeral Khatri, partner and portfolio manager, JC Clark

Focus: North American equities

_______________________________________________________________

MARKET OUTLOOK:

We’re cautiously optimistic about North American equities for 2017. While we’re comfortable with the general economic backdrop, increasing geopolitical uncertainty and elevated equity valuations give us reason to tread carefully going forward. Equity valuations are above historic norms and the relative valuation argument for equities versus bonds is weakening with each passing week as bond yields continue to creep higher. 

Potential changes to NAFTA or the implementation of a border adjustment tax, however unlikely to materialize, may act as an overhang on Canadian equities for the coming quarters. As such we think individual stock selection will be incredibly important this year, and will be the main driver of portfolio returns. We focus our time on identifying compelling bottom-up investment opportunities — we look for companies that generate a lot of free cash flow, have good management teams and have clear pathways to specific catalysts to unlock value.        

TOP PICKS:

BSM Technologies (GPS.TO)

BSM Technologies is a leading provider of telematics/fleet tracking hardware and software in North America. We see strong secular tailwinds for this company, as telematics services are still largely underpenetrated in the continent (only 20 per cent of North American commercial “fleets” use telematics). There’s also been a lot of consolidation in the space, with two of company’s larger competitors being recently acquired for multiples much higher than where BSM trades. 

We also like the fact that activist investor Crescendo Partners owns over 10 per cent of the company and has representation on the board. BSM’s stock trades at two times revenue, whereas recent acquisitions in the space have been for four times revenue and higher.    

Veresen (VSN.TO)

Veresen is an energy infrastructure play. Their main asset is a 50-per-cent stake in the Alliance Pipeline which runs from northeast British Columbia to Chicago. There’s robust upstream activity in the Montney and Duvernay regions, which helps Veresen. Free cash flow at Alliance is increasing and, as debt is paid down, we think the JV partners (Veresen and Enbridge) will look to distribute more cash to shareholders. 

The company sold their power assets, which fully funds their capital program and de-risks the dividend. You get a 7-per-cent dividend yield, it trades at 9.5 times adjusted funds from operations (AFFO) versus peers at 12 times AFFO, and a free call option on the Jordon Cove LNG project.

Richards Packaging (RPI_u.TO)

Richards Packaging is North America’s third-largest distributor of rigid packaging products, serving primarily the food, cosmetics and healthcare industries. We like the stable and defensive characteristics, but also think there’s a good runway for growth through acquisitions.

The industry is very fragmented with many smaller independents. The company can acquire these businesses for valuation multiples below where its stock is trading. 

The company generates a lot of free cash flow (9 per cent free cash flow yield) and it pays a nice dividend yield of about 4.5 per cent, which we see as ample room for them to grow. Two of their largest competitors were recently bought by private equity investors at valuation metrics that would imply a $30-$35 share price for Richards Packaging’s stock.

Company Website: www.jcclark.com