Brendan Caldwell, president and CEO of Caldwell Investment Management

Focus: Canadian value stocks
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MARKET OUTLOOK
We have performed very well for our investors and owe much of this to our focused investment strategy, which helps us avoid painful losses and participate in areas of strength. Looking forward, we see increasing value in a focused strategy as slowing growth rates in almost every sector and geography in the world will make it very difficult to perform well using a passive, market index or quasi-index strategy.

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:

1. 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 management consulting firms like CGI to stay competitive. We see this as a trend that will continue for the foreseeable future.
2. 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.
3. 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.

TFI INTERNATIONAL (TFII.TO)
TFI is one of the largest North American transportation and logistics companies. They operate in four segments: a) truckload (large B2B trucking deliveries for a single customer); b) less than truckload (smaller B2B trucking deliveries for multiple customers); c) parcel/courier (B2C deliveries as single shipments directly to customers’ residence); d) logistics (brokering the deliveries).

We like TFI for the following reasons:

1. Expansion in the U.S. TFII had a major acquisition in October 2016 (XPO’s North American assets) that greatly expanded its U.S. footprint. They have historically executed well on their acquisition strategy and should continue to penetrate this fragmented market.
2. Well positioned for e-commerce growth. They have a niche in same-day delivery for which they pick up from distribution centers and deliver locally. This is a segment largely ignored by UPS and FedEx and underpinned by a partnership with Amazon.
3. Improvement in trucking environment. Trucking conditions are expected to improve from low 2016 levels as truck capacity comes off (new regulation requiring electronic tracking; retirement of old vehicles) and as volumes stabilize.

TRANSCONTINENTAL (TCLa.TO)
Transcontinental is Canada’s largest printer with operations in print, flexible packaging, publishing and digital media. The bulk of their operations is associated with the printing and distribution of retail flyers and newspapers. They have also been expanding their footprint in the flexible packaging industry, which is their higher-growth segment.

We like Transcontinental for the compelling valuation. Transcontinental trades at a significant discount to the market driven by their exposure to print, which is in secular decline. We believe the stock warrants a higher multiple for several reasons:

1. Strong position within print. While the print industry is in decline, Transcontinental has done a great job stabilizing their print revenue. They have been able to take market share through scale, manufacturing expertise, and ultimately a lower cost structure. Furthermore, a portion of their revenue is secured by long-term contracts.
2. Exposure to flexible packaging. Packaging companies trade at a much higher multiple than print due to the growth characteristics of the industry. Transcontinental continues to leverage their strong manufacturing expertise to grow their packaging segment. This segment should continue to grow and account for a higher percentage of revenue.
3. Peer valuation. Transcontinental has historically traded at a discount even to pure printing companies that have no exposure to packaging and that are arguably less well positioned in print. We believe they should trade at a premium to (if not, at least in-line with) pure printers.
    

PAST PICKS: FEBRUARY 1, 2016

AGT FOOD AND INGREDIENTS (AGT.TO)
We still own this stock due to the long-term drivers of incorporating lentils, beans, and other pulses to food products like bread, pasta and cereal as a source of protein and fibre.

• Then: $35.34
• Now: $35.64
• Return: +0.84%
• TR: +2.51%

CLEARWATER SEAFOODS (CLR.TO)
While we believe in the long-term drivers of the fund (demand for seafood outstripping supply; CLR’s strong quota positioning), we sold half of the position in November 2016 on an earnings miss and sold the remaining half in early January 2017 (Canadian regulators set the total allowable catch for scallops below expectations, which means Clearwater will be able to sell less scallops than originally thought). Our sell turned out to be a good decision as we were able to get out before the information was digested (the stock dropped considerably the day after we sold).

• Then: $11.57
• Now: $10.10
• Return: -12.70%
• TR: -11.37%

UNI SELECT (UNS.TO)
We like UNS’ ability to drive margin expansion but sold in October 2016 due to soft organic growth, mainly due to a challenging market in the Prairies.

• Then: $61.75
• Now: $30.22
• Return: -2.10%
• TR: -1.02%

These figures take into account the 2-for-1 stock split in May 2016.

TOTAL RETURN AVERAGE: -3.29%