Veeral Khatri, partner and portfolio manager at JC Clark

Focus: North American equities
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MARKET OUTLOOK
We are cautiously optimistic about North American equities for the remainder of the year. While we are comfortable with the general economic backdrop, increasing geopolitical uncertainty and elevated equity valuations give us reason to tread carefully going forward. Equity valuations are above historic norms, which in and of itself does not constitute a red flag, especially if those elevated valuations are justified by expectations for outsized earnings growth ahead, but we don't think that's a given at this point. Potential changes to NAFTA, however unlikely to materialize, are still a risk for Canadian equities and we wouldn't be surprised if the market grinds sideways over the coming months. As such, we think individual stock selection will continue to be incredibly important this year, and will be the main driver of portfolio returns. We focus our time on identifying compelling bottom-up investment opportunities; we look for companies that generate significant free cash flow, have good management teams and have clear pathways to specific catalysts to unlock value.       

TOP PICKS

PEMBINA PIPELINE (PPL.TO)
One of Canada's largest energy infrastructure companies. They recently announced the acquisition of Veresen (which we owned) and we think this is an excellent deal for Pembina. The acquisition is financially accretive and gives Pembina a much-needed portfolio of growth projects that include the expansion of the Alliance Pipeline, Jordan Cove LNG and midstream operations. In total, Pembina now has over $20 billion in unsecured growth opportunities. Their hydrocarbon mix is now well-balanced at about a third each for crude, gas and NGL. We think the business today is worth $50 to $55 per share, but the long-term growth projects could add another $10 per share. You could see a $60-$65 stock over several years, and you're also getting a five per cent dividend yield while you wait.

WESTAIM (WED.V)
Westaim has two businesses: 1) a specialty P&C insurance business (HIIG) and 2) an asset management and specialty finance business (Arena). Both businesses are profitable and growing, and with the recently announced $600 million strategic investment by Fairfax, that growth will be accelerated. Part of that investment will be made through preferred shares and warrants, which will give Westaim ample cash to source accretive acquisitions. Fairfax will also be investing directly with the asset management business, which will double its AUM and boost its profitability. We think the shares are cheap at 1.1x book value, while other specialty insurers trade at 1.6x or higher. We wouldn't be surprised if at some point Westaim splits apart the two businesses as separate public companies to unlock value.    

ALPHABET (GOOG.O)
We think GOOG is an excellent long-term holding, and the recent tech selloff has provided a decent entry point for those not already in the name. We like the ongoing trends in the core search business; they've done a good job in capturing growth in mobile and are successfully monetizing YouTube. GOOG also has some interesting optionality with AI/machine learning capabilities and their autonomous car technology. We think GOOG offers one the most compelling valuations among the FAANG stocks; it's trading at 20x earnings if you back out the cash on the balance sheet, but you're getting 20 per cent earnings growth per year. We think that's good value.
 

PAST PICKS: FEBRUARY 28, 2017

BSM TECHNOLOGIES (GPS.TO)

• Then: $1.45
• Now: $1.55
• Return: 6.89%
• TR: 6.89%

VERESEN (VSN.TO)

• Then: $13.52
• Now: $18.55
• Return: 37.20%
• TR: 39.36%

RICHARDS PACKAGING INCOME FUND (RIP_u.TO)

• Then: $23.86
• Now: $29.56
• Return: 23.88%
• TR: 25.34%

TOTAL RETURN AVERAGE: 23.86%