MARKET OUTLOOK:
Point-to-point, Canadian stocks more-or-less tread water during the third quarter, with the S&P/TSX Composite Index returning 0.2 per cent, with dividends offsetting modest declines in prices. 

Intra-quarter, things were more interesting, with stocks steadily climbing through the first week of September, before backsliding 3 per cent into quarter end as traditionally weak September seasonality collided with widespread back-to-school/back-to-the-office activity amidst the spread of the Delta virus variant and as concerns heightened around high current inflation in both countries.  

Nevertheless, the late-quarter selloff couldn’t break the now six-quarter long string of uninterrupted gains since last spring’s nadir. 

Looking ahead, the risk and the opportunity that does strike us as worthwhile to take seriously is inflation, which we now believe will be higher for longer, with “cost-push” inflation abating over the coming year and giving way to stickier “demand-pull” inflation as household balances sheets are very strong, labour is scarce and wages are rising sharply as the service sector reopens.  

We favour price makers over price takers, we favour companies that can substitute capital and productivity enhancing technology for labour and we favour companies whose products and services address the mass market over those that address mainly the affluent.


TOP PICKS:

NFI Group (NFI TSX) 
Last bought $23.97 in September 2021
NFI Group is the leading supplier of internal combustion engine and zero emission transit buses to cities, states and provinces in North America and has a strong and growing presence in the UK and Europe as well via their recent acquisition of Alexander Dennis Ltd.  

Smaller motor coach and aftermarket parts and service segments round out the business alongside a fledgling but rapidly growing infrastructure solutions (i.e. EV charging systems) opportunity. 

Earnings are cyclically depressed, but poised to grow, potentially up to five fold between 2021-25 as demand recovers from the recession, bolstered by massive and secular global forces unleashed and funded by governments to catalyze a replacement cycle with zero emission buses displacing the legacy fleet.  

A $67 million internal efficiency initiative and significant operating leverage to recovering volumes should drive strong earnings growth in the year ahead and rapid fire design innovation should rebuild the order backlog during the upcoming generational fleet refresh cycle.

Canada Goose (GOOS TSX)
Last bought $46.55 in September 2021
Canada Goose sells luxury branded outer apparel and is best known for its iconic down-filled winter parkas. The company has traded publicly since 2017 but has operated for sixty years and is closely held with its CEO and a private equity firm owning 47 per cent of the shares.  

The company has grown sales at a 22 per cent compound rate over the last 5 years as they expand geographically in Asia, Europe and the United States and as they expand their direct-to-consumer and e-commerce channels.  

Recent product line extensions into footwear and lighter apparel should bolster sales and profits while reducing winter seasonality. A 19 per cent recent pullback in the shares affords an attractive entry point with the stock trading at 31x earnings vs. its longer term average of 49x.  

The company itself is opportunistically and aggressively buying back its own shares and has retired over 2.5 per cent of outstanding shares over the last 6 weeks. 
 

OpenText (OTEX TSX) 
Last bought $62.62 in September 2021
OpenText is a cloud and site-based enterprise information management software and solutions company. With an installed base of 100m+ users across over 10,000 companies globally, nearly 90 per cent of the company’s revenues are recurring, which affords them good sales visibility and very limited customer concentration risk.  

OpenText generates 95 per cent of its revenues outside of Canada, primarily in the United States and Europe. The current management team continues to prioritize acquisitions, funded with their prolific free cash flow and since 2010 has deployed some $6.8B across numerous acquisitions.  

Over the last 20 years, OpenText has generated a compound annual return of 14.4 per cent%...nearly double what the TSX index overall has achieved and more than double the 20-year return of the aggregate TSX tech sector, proving decisively that “boring” tech can indeed be beautiful. 

PAST PICKS: November 5, 2020

CuraLeaf (CURA CSE)

• Then: $13.20 
• Now: $14.45
• Return: 9%
• Total Return: 9%

Intact Financial (IFC TSX)

• Then: $145.05
• Now: $164.67
• Return: 13%
• Total Return: 16%

Franco-Nevada (FNV TSX)

• Then: $195.96
• Now: $161.38
• Return: -18%
• Total Return: -17%

Total Return Average: 8%