Andrey Omelchak's Top Picks: February 24, 2017

Andrey Omelchak, President & Chief Investment Officer, LionGuard Capital Management

FOCUS: Canadian Small-Mid Caps & Long-short strategies

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MARKET OUTLOOK:

We believe that the overall market multiples, both in Canada and U.S., have expanded above the levels justified by the strength and growth profiles of the underlying companies’ profitability. Post U.S. election optimism has been fueled by, among other things, promises for major investments in infrastructure, financial industry deregulation, and changes to tax code. This has led to one of the steadiest increases in the market, accompanied by some of the lowest levels of volatility.

In the environment of elevated valuation multiples, and near record low volatility, absolute return focused investors can and certainly ought to put in place proper mechanisms to protect the capital in case of a market correction. Rather than investing in the broad market, we believe that specialized stock picking, with major emphasis on downside protection, is the best way to proceed for the rest of the year.

Despite our overall cautious stance, following detailed fundamental research, we are able to find good number of high quality businesses trading at sizable discounts to their intrinsic values. Our approach is to carefully accumulate stakes in such businesses when the discount to intrinsic value increases and thus downside potential is more limited. It should be noted that in relative terms, a number of Canadian companies have become more attractive takeout candidates for their U.S. counterparts. Thus, we expect to see an elevated number of Canadian take-outs throughout 2017.

Top Picks:

EXCO Technologies (XTC.TO)

We believe that investors are just starting to realize true value of EXCO Technologies. It is extremely well-run and highly profitable business, with margin profile and return on capital metrics well above industry averages. Management has recently announced a normal course issuer bid, which should provide support for the share price. We expect continued strong results from the Company, accompanied by accretive excess capital allocation.

Pacific Insight Electronics (PIH.TO)

Pacific Insight is a highly specialized company that provides interior lightning solutions to automotive industry. Their product is recognized as one of the best on the market. In addition, demand for interactive LED lightning has been increasing at a very fast pace. PIH recently announced that they are working with Tesla on their Model 3, in addition to other new launches in the pipeline. Pacific is highly profitable, is growing fast and is a takeout candidate.

Chesswood Group (CHW.TO)

Chesswood Group is involved in small ticket equipment leasing and lending business. They are capitalizing on growing confidence of small and medium sized companies across the U.S. CHW has strong organic growth profile and good credit metrics. It is poised to largely benefit from any favorable tax code changes in the U.S. In addition to its high and sustainable dividend yield (currently at 6.7 per cent), CHW is a key takeout candidate for a larger financial institution.

Past Picks:  May 24, 2016

Element Fleet (EFN.TO)

• Then: $15.52
• Now: $14.04
• Return: +13.57%
• TR: +14.19%

ECN Capital (Started trading Sept 28, 2016)

• Then: $3.28
• Now: $3.57
• Return: +8.84%
• TR: +9.18%

Combined Return:  +23.37%

Yellow Pages (Y.TO)

• Then: $19.22
• Now: $9.40
• Return: -51.09%
• TR-51.09%

EXCO Technologies (XTC.TO)

• Then: $12.54
• Now: $11.25
• Return: -10.29%
• TR:-8.67%

Total Return Average: -12.13%

Fund Profile: LionGuard Opportunities Fund

Performance as of: January 31, 2017

• 1 month: Fund 2.94%, Index*0.85%
• 1 year: Fund 27.31%, Index*23.55%
• 2 year: Fund 20.98%, Index* 5.52%
• Since inception (annualized): Fund 17.00%, Index* 4.30%

* Index: S&P/TSX Total Return Index

* Fund's returns are net of fees and are based on reinvested dividends. 

Website: www.lionguardcapital.com