Dec 29, 2017

William Chin's Top Picks: December 29, 2017

BNN Bloomberg

William Chin , BNN

William Chin, portfolio manager at Caldwell Investment Management
FOCUS: Technical analysis and macro portfolio strategy
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MARKET OUTLOOK

The two rate hikes by the Bank of Canada really slowed the economy down. Using a four-month total (July to October, the period when rate hikes started), Canada's GDP only increased by 0.2 per cent, compared to 1.1 per cent growth in the same period in 2016. So the Canadian economy will have its work cut out for it going into 2018 because monetary policy does work with a lag. We of course have to worry about NAFTA renegotiations.

Canadian stocks underperformed U.S. stocks rather significantly in 2017. Inside both markets, there are divergences — that is, some stocks are doing better, others not so much. That means if you look carefully enough, you will find companies that do well, even in Canada. So, active management works!

Being the chief technical analyst at Caldwell, I advise on a number of funds, and we place a lot of emphasis on active management. Throughout the show the viewers will be able to see how technical analysis works in real life. Technical analysis is very useful, and it is also a lot easier than most people think.

TOP PICKS

CGI GROUP (GIBa.TO)
CGI Group manages IT and business process services for clients, including outsourcing and system integration/consulting. We like CGI Group for the following reasons:

There is a strong secular trend for consulting. As the global environment becomes increasingly competitive and as the technological landscape becomes increasingly complex, companies are increasingly relying on IT consulting firms like CGI to stay competitive. We see this as a trend that will continue for the foreseeable future.
Improving growth profile. Organic growth and future bookings have improved in recent quarters. We believe growth will continue to improve on better spending in several markets, with particularly strong demand in digitalization. Furthermore, CGI has winded down much of their lower margin contracts and are replacing these with higher margin contracts.
Growth from potential M&A. CGI has a strong track record of acquisitions. The pipeline remains strong with several large potential deals available and CGI has the means to pursue such acquisitions if they are a good fit.

CHORUS AVIATION (CHR.TO)
Chorus operates three businesses. Their main focus is a Capacity Purchase Agreement (CPA) with Air Canada. Through the CPA, Chorus operates Jazz Airline under a fixed fee arrangement. This agreement accounts for 70 per cent of Air Canada's regional capacity with a fleet of 113 aircraft and accounts for the majority of Chorus' revenue. Chorus is also in maintenance repair overhaul. They perform a comprehensive range of services such as aircraft inspections, installations, repairs, and inventory management. They have recently expanded into regional aircraft leasing. Utilizing a $200 million capital injection from Fairfax Financial, Chorus recently created a new division, Chorus Aviation Capital (CAC), where they buy regional aircraft and lease them out to regional operators globally. This is currently a small portion of Chorus' revenue but has considerable growth potential.

AG GROWTH (AFN.TO)
Ag Growth is one of the largest manufacturers of grain handling and storage equipment, such as augers and belt conveyors. 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. AG Growth is driven more by crop volumes than 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. They are particularly expecting a solid rebound in U.S. activity for the upcoming season. They have also been very good acquirers and have the opportunity to continue to expand internationally, utilize their significant scale and presence.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
GIBa	N	N	Y
CHR	N	N	Y
AFN	N	N	Y

PAST PICKS: OCTOBER 20, 2017

SLEEP COUNTRY CANADA (ZZZ.TO)
We sold Sleep Country following a disappointing recent quarter which saw slower-than-expected sales in accessories (a higher-margin product) and higher-than-expected costs. Overall, Sleep Country is executing well on its plan of taking share of the mattress industry through several means (sales-focused team with well-trained sales staff, taking advantage of weaker competition [i.e. Sears Canada bankruptcy], opening new stores in under-penetrated areas and refreshing existing stores to increase traffic). However, its high multiple left little room for error and this recent quarter highlighted that advertising costs will remain elevated. While higher advertising spending is a prudent move by management, it will result in less opportunity for margin expansion.

Then: $38.74
Now: $33.51
Return: -13.50%
Total return: -13.06%

TRANSCONTINENTAL (TCLa.TO)