Jan 26, 2018

William Chin's Top Picks: January 26, 2018

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

Market metrics in the U.S. are at extremes. Sentiment, fund flows are very high and technically very overbought. Many will point out these are late cycle signals, but it's important to note that none of these are sell signals So, it's even more important to follow technical analysis. One prudent move our viewers might consider is to re-balance your portfolio. That way you are selling high, and buying low. Active management is always important and even more so these days.

The TSX is not as strong, we don’t have the big tech names and NAFTA is on many people’s minds so we are just going sideways, but showing some exhaustion, so maybe a pullback first. The Bank of Canada of course is another concern. They raised rates recently citing a strong economy for 2017, but it was a story of two halves. The first half was stronger, but the second half not so much. Our household debt-to-income ratio is the highest in the G7 at 170 per cent so the rate hikes will have bigger than usual impact going forward.

TOP PICKS

AGF MANAGEMENT (AGFb.TO)
AGF Management is a diversified global asset management company with retail, institutional, alternative and high net worth businesses. The company serves over one million investors and has over $36 billion in AUM. It had a difficult five-year stretch from 2011 to 2016, driven by significant investor outflows on weak fund performance and loss of share to banks/independent asset managers amidst an increasingly challenging environment (regulatory changes and fee pressure driven by ETFs). This has left AGF trading at a significant discount to peers. However, AGF has brought in new management to help drive a turnaround plan that we feel will help narrow this discount, highlighted below:

A more diversified and conservative investment strategy, which is leading to improved performance and, ultimately, less outflows.
Diversifying into non-mutual fund areas such as infrastructure, factor-based and ETFs. Targeting $10 billion in AUM by 2020, which is a substantial increase on the current $36-billion AUM.
New chief of marketing to create re-branding strategy to revitalize the brand.

AG GROWTH (AFN.TO)
Ag Growth is one of the largest manufacturers of grain handling and storage equipment, such as augers and belt conveyors. We like Ag Growth for the following reasons:

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.
They're 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're particularly expecting a solid rebound in U.S. activity for the upcoming season.
Further expansion opportunities. They've been very good acquirers and have the opportunity to continue to expand internationally, utilize their significant scale and presence.

EMPIRE CO. (EMPa.TO)
Empire Co. is a food retailer through wholly-owned subsidiary Sobeys. It owns/franchises 1,500 stores in 10 provinces under the retail banners of Sobeys, Safeway, IGA, FreshCo and others, as well as 350 retail fuel locations.
We like Empire for the following reasons:

Turnaround story. Empire has struggled over the past several years due to a series of operational miscues, mainly the poor integration of its 2013 Safeway acquisition (for example elimination of the Safeway private label brand/loyalty program, both popular with customers), but also heightened promotions which deteriorated margins. Empire has recently brought in an experienced and operationally focused senior management team that put "Project Sunrise" in place — a plan that aims save $500 million annually by 2020 through various cost-saving measures (corporate restructuring, a shift to a centralized structure from its current regional one, new IT systems, and an improved procurement process with vendors). We believe the stock will react positively as they execute on this plan.
A recent improvement in its top line. After an extended period of deflationary grocery environment in Canada driven mainly by an influx of competition, the industry appears to have stabilized (evidenced by a recent return to food inflation) as the market has better absorbed the competition. This return to inflation combined by several marketing and pricing initiatives of the new management team has had a positive effect on Empire's same-store sales. This is a trend we believe will continue in the near future.