Andrey Omelchak, president and CIO of LionGuard Capital Management
Focus: Canadian equities
We are of the view that following several years of the bull market, most of the good news is starting to be priced in and that a “healthy” pause is warranted. Market multiples are currently above their historical levels and the yield differential between equities and fixed income alternatives has shrunk. Furthermore, it is becoming increasingly clear that various pro-market changes contemplated by the Trump administration will be challenging to accomplish.
We are also seeing a record number of M&A activities, which is yet another sign that caution is warranted. In our own LionGuard Opportunities Fund, we have seen eight takeout announcements year-to-date.
Despite our cautious stance on the overall market levels, and our view that a sizable portion of it has been artificially inflated by the availability of cheap credit, we do find a good number of high-quality businesses trading at attractive prices. We encourage investors to invest in stable and predictable businesses only and to steer away from speculative activities.
Lastly, if history is any indication of the future, it is unlikely that current extremely low levels of market volatility, as per the VIX Index, will persist for an extended period. In our opinion, those investors who can position their portfolios to profit from a pickup in volatility should seriously consider available alternatives.
CHESSWOOD GROUP (CHW.TO)
Chesswood Group is involved in the 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 a strong organic growth profile and good credit metrics. It is poised to largely benefit from any favourable 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.
FIRAN TECHNOLOGY GROUP (FTG.TO)
Firan Technology Group is a supplier of aerospace and defence electronic products and subsystems to mainly aviation and defence industries. It is run by a capable management team focused on value creation through organic growth and select acquisitions. Firan recently completed its acquisition of another company and is currently in the middle of integration. Although integrations are never simple, given management track record we expect them to deliver on their promises. We also expect to see large margin improvement, as compared to historical run-rate, once full benefits of integration are realized.
LAURENTIAN BANK OF CANADA (LB.TO)
Laurentian Bank is currently undergoing major changes by rationalizing its branch network and investing in high ROE activities. Its management team has done a great job, especially over the last 12 months, at turning the bank in the right direction. The recent acquisition in the United States has yet to prove itself and should be followed closely. Despite this uncertainty, however, we are of the view that the bank trades at a higher discount, to its larger Canadian peers, than warranted. LB pays a dividend yield of 4.5 per cent and in our view is well-positioned to continue increasing dividends over time.
PAST PICKS: FEBRUARY 24, 2017
EXCO TECHNOLOGIES (XTC.TO)
- Then: $11.25
- Now: $11.29
- Return: 0.35%
- TR: 1.75%
PACIFIC INSIGHT ELECTRONICS (PIH.TO)
- Then: $9.51
- Now: $10.4
- Return: 9.46%
- TR: 9.46%
CHESSWOOD GROUP (CHW.TO)
- Then: $12.31%
- Now: $12.40
- Return: 0.73%
- TR: 3.56%
TOTAL RETURN AVERAGE: 4.92%
FUND PROFILE: LIONGUARD OPPORTUNITIES FUND
LionGuard Opportunities Fund (the “Fund”) has the objective to achieve absolute long-term growth of capital through disciplined investing in select North American equities. The Fund invests on a long/short basis and intends to achieve positive absolute returns with low correlation to equity markets. The Fund is registered on FundServ under codes LGC100 (Class A) and LGC102 (Class F).
PERFORMANCE AS OF JUNE 30, 2017:
- 1 month: Fund 5.51%, Index* -0.75%
- 1 year: Fund 24.37%, Index* 11.05%
- 2 years (annualized): Fund 14.24%, Index* 5.27%
- Since inception (annualized): Fund 17.11%, Index* 3.59%
* Index: S&P/TSX Total Return Index