Apr 24, 2018

James Telfser's Top Picks: April 24, 2018

BNN Bloomberg

James Telfser , BNN

James Telfser, partner and portfolio manager at Aventine Asset Management
Focus: Canadian equities

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MARKET OUTLOOK

While we’re still recovering from some extreme equity market volatility, we’re finding comfort in the improvements we’re seeing in our risk model. Interestingly, other asset classes such as high-yield bonds didn’t deteriorate nearly as much as equities and now that equity volatility has settled down it’s providing a chance for investors to catch a much-needed breath. It’s rare to see a quarter where earnings growth and guidance is this strong both north and south of the border, but with multiples contracting. We believe this has set up a reasonable buying opportunity for U.S. and Canadian equities.

Fundamentally, the global growth story remains supportive. Global growth momentum is slowing down, but is still trending at robust levels, which bodes well for corporate earnings. There remain several geopolitical outcomes that could hold back global markets with the most pressing being the U.S.-China trade showdown. The outcome will be very hard to predict with certainty, but past events have shown us that it’s likely the market climbs this wall of worry. If a positive solution to this issue emerges, we believe it could be the catalyst for the next leg higher in markets.

As concentrated value investors, we’ve had to be more selective than usual with respect to new positions as several exceptional Canadian companies have recently gone on sale. In both Canada and the U.S. we have been focused on technology and industrials, both of which we believe will benefit disproportionately as volatility settles down. We continue to recommend holding onto or adding to commodity-linked equities at this stage of the cycle.

TOP PICKS

PEOPLE CORPORATION (PEO.TO)

People Corp is a high-quality Canadian growth story which we believe is in the initial stages of becoming a staple in mid-cap portfolios across the country. Through a successful consolidation strategy executed to date in the Canadian human resource space ($80 million deployed on acquisition since 2015), the management team at People has proven they’re excellent capital allocators. In this highly fragmented segment of the Canadian market, People has clearly found an operating model that works, having posted organic growth of more than 10 per cent for seven of the past nine quarters. With a clean balance sheet and plenty of dry powder, we like the catalyst potential and are comfortable with valuation for this highly recurring business mode, given our expectation that they will continue to find attractive deals.

EVERTZ TECHNOLOGIES (ET.TO)

Evertz is a global leader in the broadcast technology industry. It’s positioned to disproportionately benefit from the upgrade cycle to cloud-based media delivery. The company has demonstrated exceptional internal returns and smart capital allocation practices over a long period of time. It’s trading at an undemanding valuation and yields 4.5 per cent. We have a high probability 12-month expected total return for Evertz in excess of 25 per cent, with potential for additional upside from transaction-related catalysts.

DESCARTES SYSTEMS GROUP (DSG.TO)

Descartes has a lot of the characteristics that we’ve been looking for in the current environment. As a software company with a focus on logistics (ecommerce, supply chain management and tracking) and a mission to consolidate the industry, we believe that Descartes will continue to benefit shareholders through catalysts in the form of M&A and organic growth. While investors were disappointed last quarter with MacroPoint, a recent acquisition, and organic growth which came in weaker than expected, we suspect Descartes will surprise to the upside as the year progresses. Descartes has an impressive management team and an exceptional free cash flow profile, which handily offsets a valuation that’s higher than in most companies we own.