Sep 21, 2016

Bruce Campbell's Top Picks: September 21, 2016

BNN Bloomberg

Bruce Campbell , BNN

Bruce Campbell, President and Portfolio Manager, StoneCastle Investment Management

Focus: Canadian equities

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Market Outlook

During the last month the overall markets have not made up much ground and have experienced increased volatility around economic uncertainty and the Federal Reserve’s decision on interest rates. The most recent market moves aside, the indicators that we follow continue to be positive. We have experienced a slight drop in momentum in the last month but this is not unexpected. With the breadth and volume thrusts that occurred in July a lot of the internal energy was used up. It often takes the markets two to three months to rebuild internal energy before the next move higher. In addition to that fact, we are in the midst of the weakest seasonal period for the markets to the end of October and it is not surprising that the markets are trendless.

We have experienced an interesting change in the relative relationship between growth and value with the indicators we follow. Value stocks have been in favour since April 2015, but just recently that relationship has changed in favour of growth companies. These trends have historically lasted for 18 to 24 months once the change occurs.

Economically, we continue to see numbers that are positive but not outstanding. We need to continue to monitor the ISM Manufacturing and Services levels to watch for a drop below the critical level of 46. If that occurs, investors will need to position portfolios for a recession and weaker markets.

We will continue to monitor the top-down indicators for any changes. As of right now, we are on offence with our portfolios. If we see the 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 whether the indicators are on offence or defence. The next webinar is October 19, 2016 at 4:30pm ET. To register, contact info@stonecastlefunds.ca

Top Picks

Spin Master (TOY.TO)

This is a leading children’s entertainment company with a diversified portfolio of toys, games and entertainment brands. The company began out of the garage of the founders and continues to be innovative to this day. It has demonstrated growth both organically and via acquisition to drive double-digit growth rates. The stock trades at a reasonable price/earnings to growth ratio, but ideally an investor would wait for a pullback to initiate a position in the company. The last purchase was $26.60.

goeasy (GSY.TO)

This 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 have the business streamlined and is now at the point of inflection. The company has been growing net income at over 20 per cent compounded per year since 2001. The stock trades less than nine times 2017 earnings forecasts. The last purchase was $22.27.

Sleep Country Canada (ZZZ.TO)

Sleep Country is the number one mattress retailer in Canada. The company went public in July 2015 for the second time. The business continues to provide impressive growth with 12 consecutive quarters of same store sales growth. Sleep Country should continue its growth and expand through the country by adding more store locations. The company has also been focusing on sales of higher-margin accessories. The stock is not cheap but trades at a reasonable valuation for the past growth and expected future growth. The last purchase was $24.72.