Bruce Campbell, president and portfolio manager at StoneCastle Investment Management
Focus: Canadian equities
We continue to be constructive on the economy and the markets. Several of the economic indicators that we follow continue to show strength in the U.S. economy. The ISM Manufacturing and ISM Services indices both bottomed in early 2016 and continued to improve, including the most recent readings. The probability of a recession in the next six months is low, based on historical precedents when the indices are at these levels. The ECRI leading economic indicator continues to show improvement and is now at a level higher than the previous recession.
The top-down market indicators that we follow also continued to improve during most of 2016. We look at short-, intermediate- and long-term indicators. The intermediate-term indicators are comfortably positive and continue to improve. The long-term indicators have turned positive in the last three months. Historically, once the long-term indicators turn positive, they stay positive for an 18- to 36-month period. The short-term indicators are positive and continue to work off extended territory from the post-U.S.-election run-up.
Sentiment can’t be used as a timing guide but can provide clues as to the probability of a market’s next moves. Individual sentiment continues to be fairly high while institutional sentiment is at the lower end of the scale. In the past, when sentiment has been in a similar position, markets have tended to trade sideways.
We are in the strongest seasonal period for the markets, which runs from November to May. With the indicators that we follow positive on all time frames, we remain on offence with our portfolios.
We will continue to monitor the top-down indicators we follow for any changes. If we see those indicators change, investors will want to adjust their portfolios to build a more defensive posture.
We host a regular monthly webinar where we update investors on the indicators and whether we are on offence or defence. The next webinar is on February 1, 2017 at 4:30 p.m. ET. To register, contact firstname.lastname@example.org.
CENTRIC HEALTH (CHH.TO)
Centric is a Canadian health-care company focused on two segments: Specialty Pharmacy and Surgical Centers. The company is in a turnaround having recently sold a division, and is using the proceeds to deleverage the balance sheet. They have a unique relationship with McKesson, which has provided access to capital and growth opportunities in the Specialty Pharmacy division. The last purchase was $0.64. Funds own, but none personally or family.
PACIFIC INSIGHT ELECTRONICS (PIH.TO)
The company provides design, development and manufacturing of electronics and lighting for the auto industry. The company’s main growth area is LED lighting as manufacturers continue to enhance the driver’s experience. The company has had strong annual revenue and earnings per share growth, but can experience lumpy quarterly results. The lumpiness of the quarters provides opportunities for discipline investors. PIH customers include Caterpillar, Daimler, Ford and, most recently, Tesla. The company grew earnings over the last five years at 37 per cent annualized. The stock trades at less than eight times earnings. The last purchase was $9.93. Funds own, but none personally or family.
The company provides alternative financial solutions through two divisions: easyhome leasing and easyfinancial. The easyfinancial division is the faster-growing side of the business as they expand into consumer loans of $1,500 to $15,000. Management has done a tremendous amount of work the last few years to streamline the business, and now it is at the point of inflection. The company has been growing net income at over 20 per cent compounded since 2001. The stock trades at less than 10 times earnings. The last purchase was $28.00. Funds own, but none personally or family.
PAST PICKS: DECEMBER 9, 2015
ALIMENTATION COUCHE-TARD (ATDb.TO)
- Then: $60.74
- Now: $60.91
- Return: +0.27%
- TR: +0.79%
CASCADES INC. (CAS.TO)
- Then: $11.69
- Now: $12.85
- Return: +9.92%
- TR: +11.74%
CONVALO HEALTH INTERNATIONAL (CXV.TO)
- Then: $0.29
- Now: $0.12
- Return: -59.32%
- TR: -59.32%
TOTAL RETURN AVERAGE: -15.59%
FUND PROFILE: STONECASTLE FUND
PERFORMANCE AS OF JANUARY 20, 2017:
- 1 month: Fund 6.29%, Index* 1.67%
- 1 year: Fund 26.47%, Index* 31.28%
- 3 years: Fund 4.24%, Index* 3.58%
* S&P/TSX Composite Index
* Returns include all distributions and are net of all fees
TOP HOLDINGS AND WEIGHTINGS
- Cash: 14.03%
- Emblem Corp: 4.46%
- Sun Life Financial: 3.16%
- HudBay Minerals: 3.06%
- Encana Corp: 2.94%