Bruce Campbell, president and portfolio manager at StoneCastle Investment Management

Focus: Canadian equities
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MARKET OUTLOOK
We continue to be constructive on the markets. During this year, we have seen the top-down economic and market indicators that we follow continue to improve. We entered the year on defence and then moved to offence in March. Since moving to offence, we have seen the participation in the markets broaden out. We now see that many of the traditional growth areas are once again beginning to outperform as investors are more optimistic about earnings growth at the same time that investors have focused more on growth over value.

Immediately prior to the U.S. elections, the markets experienced a period of consolidation where there was not much price performance, positive or negative. In the weeks leading up to the election, we began to see a re-acceleration of inflation expectations that began in February. Following the election, a dramatic shift occurred as investors repositioned for growth, higher interest rates and higher inflation. Dramatic sector rotation has occurred where the traditional “safe-haven” companies’ share prices have dropped as investors re-calibrate their portfolios for growth. As a result, we have seen new leadership emerge in the materials, technology, financial and energy sectors.

We are heading into the strongest period, historically, from November to May. Investors should monitor the top-down market and economic indicators. If they continue to stay positive, remain on offence.

Investors should bear in mind that, historically, post-U.S.-election years have had an unpleasant statistic. Nine of 14 economic recessions began in the years following a U.S. election. While you cannot invest solely based on history, it does require you to be on higher alert when following the top-down indicators. Reviewing the presidential election cycle shows that with first-term presidents, the market tends to rise into summer and then experience a sell-off into the fall and winter of the new president’s first term.

We will continue to monitor the top-down indicators we follow for any changes. As of right now, we are on offence with our portfolios. If 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 November 23, 2016 at 4:30 p.m. ET. To register, contact info@stonecastlefunds.ca

TOP PICKS

GRANDE WEST TRANSPORTATION (BUS.V)
The company designs, builds and sells buses for mass transit in the mid-size category. The buses they manufacture are heavy duty, reliable and more efficient for the operators. The company is tracking 500 per cent growth year over year, and is at the cusp of turning cash flow and earnings positive. Company management has conducted a scenario analysis that sees a range of EPS for 2017 of $0.04 to $0.24 per share. They have a large, untapped market in the U.S. and recently completed their first sale there. The last purchase was $1.07. Funds own, but none personally or family.

CRH MEDICAL (CRH.TO)
The company provides physicians with treatments and services for gastrointestinal disease. Originally, they grew organically, but most recently they have been growing by acquisition. CRH is building a strong business that primarily grows via acquisition and has a full pipeline of opportunities for years to come. Strong free cash flow generation allows management to continue to roll up small acquisitions without requiring them to raise additional capital. The last purchase was $6.93. Funds own, but none personally or family.

PREMIUM BRANDS HOLDINGS (PBH.TO)
The company owns a range of specialty food manufacturing facilities in North America. They market premium processed meats, deli and pre-packaged sandwiches and specialty bakery products. The management team has a proven track record of deploying capital efficiently to target organic and acquisition growth. The company has several organic growth initiatives for the next three to five years and also a full pipeline of acquisition opportunities. The last purchase was $65.47. Funds own, but none personally or family.
 

PAST PICKS: NOVEMBER 18, 2015

GOEASY (GSY.TO)

• Then: $21.30
• Now: $23.38
• Return: +9.76%
• TR: +12.38%

KINAXIS (KXS.TO)

• Then: $44.00
• Now: $62.35
• Return: +41.70%
• TR: +41.70%

PATIENT HOME MONITORING (PHM.V)

• Then: $0.52
• Now: $0.15
• Return: -71.15%
• TR: -71.15%

TOTAL RETURN AVERAGE: -5.69%