Full episode: Market Call for Wednesday, December 12, 2018
Bruce Campbell, president and portfolio manager at StoneCastle Investment Management
FOCUS: Canadian equities
We follow top-down economic and market indicators to help us to determine if our portfolios are on offence or defence at any given time.
Currently the top-down economic indicators have been strong and resilient on multiple data points. We’ve started to see some of the leading indicators (like the Chemical Activity Barometer) starting to show weakness. We also apply technical analysis to economic data and this is where things get a little more interesting. Some economic data is getting extended and technically getting to levels where the trends may become extended. We will need to watch the shorter-term economic indicators (such as the Citi Economic Surprise Index) for a trend change.
There’s a lot of investor concern around the possibility of an upcoming recession. In fact, there’s more pessimism prior to economic weakness than at any other time we can recall. This makes sense as this has been one of the most hated bull markets in history. We will continue to monitor the indicators to assess any economic weakness, which tend to occur prior to a recession.
The top-down market technical indicators that we follow experienced significant weakness during October and November. Many short- and intermediate-term indicators have gone through significant deterioration. We’re now watching these to determine if a market bounce is a dead cat bounce before more downward selling, or the end of the correction. At the present time our portfolios are positioned in neutral with cash buffers built up while we wait for confirmation from the indicators we follow.
We review the indicators each month in our monthly indicator webinar. To receive an invitation to the webinar, please send an email to firstname.lastname@example.org and we will add your email to our invite list.
CANNEX CAPITAL (CNNX.CD)
Last purchased at $0.70.
The company operates vertically integrated cannabis operations in Washington state and recently announced a merger with 4Front. This will build one of the best operating and cheapest multi-state operators (MSO) in the U.S. by combining Northwest Cannabis’ expertise in cultivation and extraction along with 4Front’s expertise in adding licences and building new regulator justifications. The stock of the combined company trades at 5.5 times 2020 enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA) while peers trade at 13.7 times.
VALENS GROWORKS (VGW.CD)
Last purchase was at $1.95.
The company holds several Health Canada licenses in the cannabis sector. Unlike many traditional licensed producers (LPs), Valens specializes in the extraction of cannabis. With a long history of producing extracted products under the Marijuana Medical Access Regulations (MMAR) program, this company is building a reputation for producing high-quality products with high yields. It provides contracted extraction services and has already announced several LP customers. With their current capacity, we estimate they could produce $20 to $30 million in EBITDA in 2019. With an enterprise value in the $140 million range, the stock trades at 5.6 times EBITDA while peers trade at 20 times EBITDA.
PROTECH HOME MEDICAL (PHM.V)
Last purchase was at $0.12.
Protech sells hardware and supplies for home healthcare. Ventilation, oxygen, sleep therapy and mobility are their key markets. The company has been growing organically at high single digits and trades at less than five times 2019 EBITDA compared to peers trading in the 10 to 14 times range. Management owns over 18 per cent of the company and has been working hard to improve its financial ratios over the last three quarters.
PAST PICKS: NOV. 8, 2017
RELIQ HEALTH TECHNOLOGIES (RHT.V)
- Then: $0.60
- Now: $0.28
- Return: -54%
- Total return: -54%
BEWHERE HOLDINGS (BEW.V)
- Then: $0.47
- Now: $0.22
- Return: -54%
- Total return: -54%
STORAGEVAULT CANADA (SVI.V)
- Then: $2.24
- Now: $2.61
- Return: 17%
- Total return: 17%
Total return average: -30%
Purpose Canadian Income Growth Fund
Performance as of: December 11, 2018
- Year-to-date: -13.65% fund, -6.58% index
- 1 Year: -0.39% fund, -5.73% index
- 5 Year: 6.98% fund, 5.39% index
Index: S&P/TSX Composite Index Total Return.
Returns include all distributions and are net of all fees.
TOP 5 HOLDINGS AND WEIGHTINGS
- Cash: 39.8%
- Granite REIT: 4.86%
- Northwest Healthcare REIT: 4.33%
- Alaris Royalty: 4.22%
- Diversified Royalty: 4.01%