Gerard Ferguson, CEO and portfolio manager at J2 Capital Management Inc.
Focus: Canadian equities
Given the recent rally (really since mid-Q1 2016) valuations appear stretched as the market anticipates the return to growth as Trump “makes America great again.” Given that we do see many of his intended policies as being pro earnings growth, we are willing to overlook the high teens multiples, at least in the short term. Rising interest rates, if they do in fact continue in 2017, is probably of more concern as multiples should contract as yields climb. However, as we are coming off such extremely low levels for rates, this too is not cause for great concern — at least not yet. What is of immediate concern to us, however, is the protectionist policies of the new Trump administration.
The investment climate changed materially post the Trump victory in November. We, like most participants, felt markets would sell off materially on the uncertainty of the new U.S. president and because “safety assets” such as gold would rally. In fact, the opposite occurred, at least immediately. There are two opposing factors driving the markets. First, the early reaction was that the pro-growth policies of Trump (job growth, tax cuts and monetary policy) will spur economic growth, and subsequently earnings, propelling markets higher. Offsetting this is the belief that Trump’s closed door and his mandate to “make America (and only America) great again” is dangerous for global growth as economies become closed to trade and thus inefficient and inflationary. This belief has gathered more steam in the past few weeks as witnessed by the recovery in precious metals and drop in bond yields. Couple this with valuations towards the upper end of historic ranges, it will be hard for the markets to rally without material earnings growth.
GREENSPACE BRANDS INC. (JTR.V)
GreenSpace focuses on developing, acquiring, and marketing natural food and beverage products in North America. We believe healthy eating is a secular theme capturing the key millennial demographic with sustainable long-term growth trends. JTR has a proven management team closing on multiple M&A deals, and we view the pipeline being robust in this highly-fragmented industry. We also see meaningful organic growth as management continues leveraging their key relationships resulting in shelf expansion benefiting from scale, which improves margins. Under-covered and not well known although trading volumes have picked up as attention from the street increases.
CARGOJET INC. (CJT.TO)
Commanding a 90 per cent market share, Cargojet is the dominant provider of overnight air cargo in Canada but also provides services globally. Strong FCF generator (2017 ~11 per cent FCF Yield) we expect them to report record volumes due to the busy holiday season as CJT is a beneficiary of the explosion in e-commerce. Opportunity for material revenue and operating leverage — with the startup costs of launching Canada Post Contract (CPC) behind CJT, they can now focus on optimizing across its business units and improving margins. CPC was a transformational deal won in 2014 by CJT with an estimated value of $1 billion over seven years. As the core business begins to plateau, we see the next legs of growth to come from non-core units such as Aircraft, Crew, Maintenance (ACMI) and Charter, which we believe the market is not correctly valuing.
Franco is one of the world’s leading precious metals royalty companies. Beneficiary of inflationary and protectionist policies of the current Trump government. Franco has grown materially in the past few years as base metal companies sold off key royalties due to weak commodity prices and stretched balance sheets. Low mining and geo-political exposure allows the company to benefit fully from a recovery in precious metals prices.
PAST PICKS: JUNE 27, 2016
SEVEN GENERATIONS ENERGY (VII.TO)
Still own in the fund(s). Seven Generations sold off on a pre-announced weak fourth. Production was impacted by infrastructure delays and weather. Although unfortunate, we remain committed to the name, and in fact added to the new name when management reiterated 2017 guidance levels early in the year.
- Then: $24.13
- Now: $24.92
- Return: 3.27%
- TR: 3.27%
CONSTELLATION BRANDS (STZ.N)
We are still long this name despite all the Trump rhetoric (potential trade concerns with Mexico). Company has an impressive track record of executing on increasing beer volumes and M&A initiatives. We believe the market is not correctly discounting the company’s strong long-term growth opportunities and upside margin potential. We acknowledge the near-term concerns surrounding the Border Tax Adjustments (BTA) but believe there is low probability of it passing in its current form and if anything, a much more diluted version will go forward, and the stock is pricing in a much more material event. Given the current valuation, Constellation is trading at a discount to peer multiples despite offering roughly double the long-term topline and EPS growth potential.
- Then: $153.10
- Now: $151.83
- Return: -0.83%
- TR: -0.77%
We continue to own Boralex. Since discussing it on the show in November, the company announced the highly accretive acquisition of Enercon’s interest in a newly commissioned wind farm in Ontario (230MW). Coincidentally, with the announcement the company completed a well-subscribed equity financing, restoring their strong balance sheet and boosted their dividend (plus seven per cent).
- Then: $18.90
- Now: $20.37
- Return: 7.78%
- TR: 9.47%
TOTAL RETURN AVERAGE: +3.99%
FUND PROFILE: JEMEKK LONG/SHORT FUND
The Jemekk Long/Short Fund is an alternative, multi-strategy investment vehicle that invests primarily in Canadian- and U.S.-based securities. The Fund is focused on investing in securities with the objective of providing investors with consistent, positive and absolute returns. These investment goals will be met primarily through long and short investments in equities, convertible bonds, options and other capital market instruments.
PERFORMANCE AS OF DECEMBER 31, 2016:
- 1 month: Fund 1.3%, Index* 1.7%
- 1 year: Fund 12.7%, Index* 21.1%
- 3 years: Fund 8.8%, Index* 7.1%
* Index: S&P/TSX
TOP EQUITY HOLDINGS AND WEIGHTINGS
- Boralex Inc.: 4.2%
- Shopify Inc.: 4.1%
- Boyd Group Income Fund: 4.0%
- Tricon Capital Group: 3.5%
- Kinaxis Inc.: 3.5%