Gerard Ferguson, CEO and portfolio manager at J2 Capital Management Inc.

Focus: Canadian equities
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MARKET OUTLOOK
Capital markets continue to trend higher, fighting negative macro headwinds (Trump, rising rates) and valuations (pushing the upper end of historic norms). We seem to be in a holding pattern now where investors are weighing the positives of many of Trumps policies (Obamacare repeal, lowering corporate and income taxes and big spending) against the increasing political tensions and uncertainty of what can actually be accomplished in the U.S. Until we see more clarity on the effectiveness of a Trump presidency, the U.S. is most likely to move sideways at best.

Back at home in Canada, we face the issues of increasing protectionism (NAFTA renegotiation), energy weakness and an increasing tax burden, all of which can have a profound impact on our economic growth. Fortunately, we have seen an increase in global growth, although tentative at this point, and a rebound in energy prices which has provided a backdrop for improving earnings which should at least justify our own extended multiples. Canada can move higher but will need further economic growth (i.e. higher oil prices) and less rhetoric regarding trade from the U.S. to accomplish that.

However, we do expect markets to return to a more favourable environment for stock pickers and active management. Clearly unbridled economic growth and falling rates have driven multiples and indexes to all-time highs, reducing the usefulness of active management. A reversal of these factors should favour active-focused asset management, as opportunities to pick above-average winners against indexes should be rewarded.

TOP PICKS

BOYD GROUP INCOME FUND (BYD_u.TO)

• Boyd Group is in the collision repair business as well as glass repair. Approximately 90 per cent of revenue is from the U.S.
• This name has been in the fund since 2011 and we are still positive on the story.
• The stock is off approximately nine per cent from its highs and we see this as an attractive entry point.
• The company recently reported Q4 earnings (March 22) and the quarter overall was solid but management was cautious on the upcoming quarter, citing weather as a concern. Being long-term holders we have seen this language before and it’s always provided a good opportunity to accumulate stock. The management team is prudent and manages street expectations very well. 
• Boyd has a proven management team closing on multiple M&A deals and we view the pipeline being robust in this highly-fragmented industry. Also, recent private equity activity in this space provides a floor on valuation.

POLARIS INFRASTRUCTURE INC. (PIF.TO)

• Polaris is a renewable energy company with an operating geothermal facility in Nicaragua.
• Company restructured in 2015 under a new CEO and with new capital in an effort to capitalize on their significant resources and existing geothermal project.
• Company trades at a reasonable multiple, has an attractive yield and has a number of growth projects it can pursue to continue to increase what is already and enviable cash flow profile.
• Recently reported a very respectable quarter and has aligned investor expectations with management’s ability to deliver, which should provide a fairly predictable profile going forward.

NEW FLYER INDUSTRIES INC. (NFI.TO)

• A name we have highlighted in the past and continue to own, New Flyer is a manufacturer of heavy-duty transit buses in North America.
• The company recently reported (March 22) and posted a good quarter with little surprises on primary metrics and beat on MCI synergies.  
• We remain bullish on NFI as we see a favourable economic backdrop in the U.S. as transportation spending increases; a strong and improving balance sheet; increased traction in the aftermarket business; further synergies realized from MCI and margin enhancements; and robust free cash flow generation.
• Company trades at a reasonable multiple and exhibits good growth opportunities.
   

PAST PICKS: FEBRUARY 7, 2017

GREENSPACE BRANDS INC. (JTR.V)
We continue to own this name and since we last highlighted it, the company has reported earnings and management was quick to acknowledge some difficulties to integrating recent acquisitions. The stock post quarter consolidated and since has rallied back, hitting new highs. We commend management for addressing these M&A headwinds and our long-term view doesn’t change. We still believe this company has a strong organic and inorganic growth profile and look forward to seeing more GreenSpace products on store shelves.

• Then: $1.61
• Now: $1.67
• Return: +3.72%
• TR: +3.72%

CARGOJET INC. (CJT.TO)
Still a name in the fund and since we last highlighted it, the company has reported earnings. Revenue was a beat but some one-time costs and non-cash pension benefit costs hit the margins — we see this as transitory only and not affecting our long-term thesis on the stock. We are still committed to the name due to trends in e-commerce, growing ACMI (Aircraft, Crew, Maintenance, Insurance) revenues, compelling valuation and very strong free cash flow generation. On March 20, the company surprised the street by increasing its dividend by 10 per cent — another signal of the strength in free cash flow.

• Then: $45.77
• Now: $46.45
• Return: +1.48%
• TR: +1.90%

FRANCO-NEVADA (FNV.TO)
Franco also reported a strong quarter since we last highlighted the name on the show. Top and bottom lines continues to grow, and the company has benefitted from an improving environment for precious metals pricing and a lack of financing alternatives for emerging producers in the gold and silver space. Further, they have increased their exposure to energy with a large transaction announced recently, but will continue to keep the energy component of the company below its 20-per-cent target. We continue to own the name and have increased our exposure to Franco in the past quarter.

• Then: $89.28
• Now: $89.45
• Return: +0.19%
• TR: +0.55%

TOTAL RETURN AVERAGE: +2.05%