Mario Mainelli, Portfolio Manager, Caldwell Investment Management
FOCUS: North American Equities
_______________________________________________________________

MARKET OUTLOOK:

The market has become increasingly volatile over the past several weeks as investors grapple with rising interest rates and generally heightened market valuations. However, the U.S. economy remains in good shape (strength in housing, low unemployment, wealth effect from a strong stock market in recent years). Furthermore, S&P 500 earnings have been quite strong with many companies increasing FY2018 guidance on the back of tax reform. The recent pullback in the market combined with upward revisions to earnings has resulted in a substantial decrease in the forward price/earnings multiple of the S&P 500, which makes valuations considerably more attractive.

We believe the strong backdrop and re-introduction of volatility will provide opportunities for stock pickers, particularly those with high conviction, concentrated portfolios.

TOP PICKS

AG GROWTH (AFN.TO)
About: Headquartered in Winnipeg, Manitoba, Ag Growth is a leading manufacturer of grain handling equipment, including grain augers, belt conveyors, aeration equipment and storage bins.

Thesis:

• Storage is a growing trend. Many countries (Canada and Brazil are their main opportunities) are underinvested in grain storage. Storage gives farmers flexibility as to when and where they can sell their crops, ultimately achieving higher prices. As a leader in grain handling/storage, AFN is well positioned for this.
•  Driven more by crop volumes not crop prices (which can be volatile). This is a good thing given that crops are generally increasing in size as better farming techniques are incorporated.
• Expansion opportunities. Recent acquisitions have given AFN considerable runway for growth into secondary verticals such as fertilizer and seed. This currently only accounts for 13% of revenue but they have only just scratched the surface here in terms of the addressable market. 

DELPHI AUTOMOTIVE (DLPH.N)
About: Delphi provides products that optimize the powertrain of the vehicle (essentially what allows the vehicle to move), while meeting new emissions and fuel economy requirements. This includes fuel injection/handling, valvetrain, and other products.

Thesis:

• Strong competitive positioning. Delphi is a best-in-class operator with a long track record of consistent execution and solid market share positioning in each of its major segments. Delphi has strong relationships with most of the major OEMs and, given the high degree of technical expertise, the switching costs are high.
• Secular growth drivers. We are in the early innings of several long-term automotive trends of which Delphi is incredibly well-positioned for:
• More efficient vehicles. With a goal of reducing emissions, the majority of automotive markets will be enforcing higher efficiency requirements for vehicles with internal combustion engines (ICE). Delphi has a variety of powertrain technologies that OEMs will be utilizing to help meet these stringent requirements, such as advanced valvetrain and gas-direct injection.
• Electrification. Electrified vehicles (whether pure EV or hybrid) are expected to grow at 32% compounded annual growth between 2017 and 2025. Delphi has significantly higher content per vehicle (CPV) on electrified vehicles vs. traditional ICE vehicles. For example, Delphi’s CPV on an ICE vehicle is ~$300; however, this climbs to approximately $1,000/$1,500 for hybrid/full EVs, respectively. EV adoption is expected to be most pronounced in China (an area of strong exposure for Delphi), where EV incentives and quotas are being put in place for OEMs in an effort to fight the pollution problem.
• Great risk/reward. Automotive suppliers in general currently trade at depressed multiples, which we suspect is due to several industry fears. Delphi is no exception, trading at just 11.5x next year’s earnings, a ~30% discount to the S&P 500, despite having good visibility to mid-single digit revenue/low double-digit cash from operations growth annually over the next five plus years. Below we outline two of the main fears and why we believe they are overblown.
• “Peak auto” production in the U.S. Many investors may be hesitant to buy an auto supplier late in the U.S. auto production cycle. While it may or may not be true that U.S. auto production has peaked, most analysts and OEMs project U.S. auto production to remain at healthy levels and decline slowly over the next several years. This is vastly different from the way the last cycle ended (an abrupt drop off a cliff), which remain fresh in many investors’ minds. Auto suppliers have healthy profits at these levels of production. Furthermore, Delphi has significant exposure to Europe and Asia Pacific, limiting its exposure to declining U.S. production. Lastly, Delphi’s growth is driven by higher content per vehicle, which means Delphi could drive considerable growth even in an environment of production decline.
• Electrified vehicles jeopardizes auto suppliers. While it may be true that many auto suppliers will be hurt from the trend toward electrification, Delphi is actually a significant winner here, as described above. The long-term nature of auto platforms gives Delphi good visibility to the pace of adoption and it should be a significant catalyst when EV adoption picks up post 2020.

The solid growth expected from the company over the next five years combined with the strong probability of multiple expansion leaves us with confidence that the stock will be trading substantially higher in the years to come.

MITEL (MNW.TO)
About: Mitel focuses on unified communications and collaborations (UCC), which integrates different types of communications across different end users, geographies, and devices with the goal of reducing inefficiencies.

Thesis:
On premise communications solutions are generally declining at mid-single-digits annually as more and more customers switch to public cloud (lower costs; increased flexibility). Given that much of Mitel's Enterprise segment is on-premise, many investors unfairly view the company as structurally declining, which causes it to trade at a depressed multiple. However, we believe they are overlooking the following:

• ShoreTel acquisition. In September 2017, Mitel acquired ShoreTel, which improves their North American exposure (Mitel had previously been focused in Europe) and more importantly, greatly increases their public cloud exposure (from 10% of revenue to 25%). Pubic cloud is generally growing at 15-20% and commands a much higher multiple. Factoring in this growth trend, Mitel could see this segment grow to 40%+ of revenues within 5 years and could be even higher if we factor in bolt-on acquisitions. Furthermore, Mitel expects $60 million of operational synergies from the acquisition and, given their history of exceeding on synergy targets, many believe the synergies could be significantly greater.
• Better than expected Enterprise growth. Mitel expects their Enterprise segment to significantly outperform the industry (flat to slightly down vs. -6% industry) over the next few years. There are three reasons for this:
• Growth in hybrid. Few mid- to large-sized companies are ready to fully embrace a cloud solution, preferring a hybrid solutions instead. Mitel has had success converting their large on-prem installed base to hybrid solutions and expect this success to continue.
• Broad product portfolio. This makes Mitel a preferred partner for suppliers.
• Competitor bankruptcy. Avaya, a competitor in Enterprise solutions, filed for bankruptcy in January 2017. While they continue to operate as a restructured company, the disruption has caused a loss of many existing and potential new customers, with Mitel reaping the benefits.
• Strong competitive positioning. Mitel is one of the largest pure UCC providers in the world (#1 in hybrid solutions) and has significant expertise in the space. Their global presence and broad solution set (spans nearly the entire spectrum) allows Mitel to give their customers what they want. Having said that, they are also strategic in areas they chose not to compete - they tend to avoid very small public cloud clients (lower margin; higher volatility) and very large enterprise clients (dominated by Microsoft and Cisco). 
• Significant multiple re-rate opportunity. Mitel trades at approximately 13x next year's earnings, a ~25% discount to the S&P 500's 17x. Given the above points and the considerably higher expected free cash flow & EBITDA margin profile, we could see the stock double over the next few years if they can execute on their game plan and get proper credit for their recurring cloud exposure.

 **NO PAST PICKS – FIRST APPEARANCE ON MARKET CALL**

Fund Profile
Name Caldwell Canadian Value Momentum Fund

Performance as of January 31, 2018

1 Year: 13.3% Fund, 6.7% Index*
3 Year: 13.3% Fund, 5.9% Index*
5 Year: 11.6% Fund, 7.9% Index*

* Index: S&P/TSX Total Return Index
* Identify if your fund’s returns are based on reinvested dividends. Returns provided must be net of fees!

5b. Include the top 5 holdings and weightings.

1. CGI Group - 6.3%
2. WSP GLOBAL - 6.2%
3. Cargojet - 5.9%
4. IBI Group - 5.5%
5. Martinrea - 4.6%

Website: www.caldwellinvestment.ca