Peter Hodson, CEO and head of research at 5i Research

Focus: Canadian small- and mid-cap stocks
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MARKET OUTLOOK
We have tried to ignore politics and to focus on earnings and company fundamentals. But there has been a big rally since Trump was elected, and last week's failure of the passing of a new health bill may worry some of the recent bulls. Things may not change as quickly as planned, and this may include tax changes. So there is a bit of a curve ball from the political world, perhaps. However, corporate earnings remain decent, takeovers are continuing, and we can barely keep up with the announcements of dividend increases. Investors are concerned about the length of the rally, but this concern has been in place a very long time. Sure, we are “overdue” for a correction, but this does not mean you are actually going to get one soon. Waiting for a correction can be painful, and our data suggests there is still a lot of cash on the sidelines. We think stock picking remains the key: don't just buy the market. If you do, you will load up on financials and resources, instead of good-quality growth companies. There is plenty of good growth still available, if you look for it.

TOP PICKS

PREMIUM BRANDS (PBH.TO)
A solid consumer name. Makes packaged sandwiches, meats etc. for a wide variety of customers. Another solid quarter recently, and another dividend increase. Good growth, earnings could rise 50 per cent this year, good acquisitions and growing cash flow. Not cheap at 25X earnings, but well worth it. New facilities coming on line soon.

METHANEX (MX.TO) 
A shorter-term call on earnings momentum, as methanol prices have now risen for six months. The company has fewer shares than a decade ago, keeps raising its dividend, and trades at 10X earnings. Potential activist involvement makes it a bit more interesting. Methanol supply seems fairly tight.

ZCL COMPOSITES (ZCL.TO)
We pay attention when a dividend rises 50 per cent as it did this month with ZCL. Then, the company paid a special dividend as well. This highlights the strength of its balance sheet and prospects. The underground storage market continues to grow, even with weakness in the oil and gas sector. The company is reducing costs, thus earnings leverage will be high when business picks up again. A yield of 3.6 per cent, no debt and good cash flow make it our kind of story at 16X earnings.

Note: No “purchases” on these as it is a model portfolio only. 5i Research does not manage money.
 

PAST PICKS: MAY 6, 2016

KINAXIS INC. (KXS.TO)

• Then: $48.94
• Now: $72.09
• Return: +47.30%
• TR: +47.30%

ALIMENTATION COUCHE-TARD (ATDb.TO)

• Then: $54.17
• Now: $59.28
• Return: +9.43%
• TR: +10.02%

SAVARIA CORP. (SIS.TO)

• Then: $7.99
• Now: $12.58
• Return: +57.44%
• TR: +61.08%

TOTAL RETURN AVERAGE: +39.46%