Ryan Modesto, chief executive officer of 5i Research

Focus: Canadian small- and mid-cap stocks
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MARKET OUTLOOK
It has been a busy summer between a surging Canadian dollar, higher interest rates in Canada, and an earnings season that looks to be off to a strong start. Until recently, markets have largely seemed to be in a holding pattern, as investors awaited results to see if this market rally could be sustained. Interestingly, it looks like the fundamentals continue to support the premiums being seen in the markets with, to date, 65 per cent and 66 per cent of companies in Canada beating revenue and earnings estimates, respectively. Not to be outdone, the United States shows that 71 per cent and 73 per cent of companies have beat revenue and earnings estimates so far this quarter. While there will always be “something” to worry about in the markets, with earnings continuing to be strong, rates continuing to be low, and North American economies continuing to strengthen, it is getting difficult to be too negative on the markets.

TOP PICKS

THE STARS GROUP (TSGI.TO) – Formerly Amaya Inc.
Lots of past problems with this name, but they have put a lot of it behind them. Fundamentally, everything is moving in the right direction. Margins are improving, debt is falling, and interest coverage is better. Also, if we look back a year or so, the company cited a stronger U.S. dollar as being a reason that customers were gambling less. Now, with the fall in the USD, we may see the buying power of the customers increase. Finally, once the debt load gets to a comfortable level for the company, they should have a significant amount of cash flow that they can put to work in adding shareholder value.

NEW FLYER INDUSTRIES (NFI.TO)
The valuation at NFI is fair, the balance sheet is strong and they continue to win contracts. Markets were spooked a little with the order backlog not being as strong as they expected, but there is some lumpiness in contracts and demand continues to be strong. We would view the recent weakness as an entry opportunity at NFI.

PHOTON CONTROL (PHO.V)
The company is going through a transition phase as they bring in a new CEO, who is building out the executive team. The valuation looks cheap for a company that is growing fast and holds 20 per cent ($32 million) of its market capitalization in cash. We think management will look to add some value with the access cash at some point sooner rather than later. PHO should also see their share in the growth of semiconductor companies as that space comprises most of their customers.
 

* Held in model portfolio; 5i Research does not manage money

PAST PICKS: JUNE 24, 2016

AIRBOSS OF AMERICA (BOS.TO)
Airboss has struggled over the past year or so with a defence business purchase that hasn’t met expectations in the short-term, as well as with some management turnover and simply slower demand for their rubber compounding products. We think BOS is essentially waiting for the next up-cycle in demand. In the meantime, they are paying down debt and positioning themselves to take advantage of any stronger demand that may appear.

• Then: $14.10
• Now: $13.15
• Return: -6.73%
• Total Return: -4.25%

EXCO TECHNOLOGIES (XTC.TO)
Exco has become more interesting over the year. The valuation is very cheap; the dividend is nearing three per cent while having plenty of room for growth, and the company has historically been shareholder friendly. XTC had a few lacklustre quarters over the last year. But recently, it looks like things are back on track at the company. If you are a value investor, it is hard not to like Exco.

• Then: $12.20
• Now: $10.88
• Return: -10.81%
• Total Return: -8.47%

PREMIUM BRANDS HOLDINGS (PBH.TO)
Premium Brands continues to be a company we like and have held it in our model portfolio for quite some time now. The payout ratio leaves plenty of room for dividend increases and the company is good at sourcing organic growth. While the valuation is on the higher side, PBH has a knack for finding value-added acquisitions that make the valuation look more than reasonable once the deal is closed.

• Then: $52.70
• Now: $90.23
• Return: 71.21%
• Total Return: 76.11%

TOTAL RETURN AVERAGE: 21.13%