Colin Stewart, CEO and portfolio manager at JC Clark Limited
Focus: North American large caps
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MARKET OUTLOOK
After a long period of relatively calm markets, volatility reappeared in February and March. While it’s always difficult to pinpoint a single cause, we attribute the recent market pullback to a combination of factors: fears of a global trade war, rising interest rates, historically high valuations and continued geopolitical risks.
While the global economic backdrop and corporate fundamentals remain relatively strong, we believe recent market volatility will likely continue. Broadly speaking, we’re late in the market cycle and risk levels remain elevated. As such, the current environment warrants a more defensive investing approach. In recent weeks we’ve raised cash across a number of our fund strategies, sold non-core positions, and added to our portfolio hedges in certain funds. Now more than ever we’re focusing on high quality businesses with strong balance sheets, solid free cash flow and reasonable valuations.
TOP PICKS
CASCADES (CAS.TO)
Most recent purchase on Tuesday at approximately $12.58 per share.
Cascade is the leading North American producer of containerboard and tissue. The company bis benefiting from strong conditions in the containerboard industry: demand growth (driven by e-commerce and increasing demand for boxes), minimal new supply, 97 per cent capacity utilization and rising prices. Cascades is also benefiting from lower input prices for recycled fibre.
They sold a non-core stake in Boralex last year and continue to simplify and deleverage their business. The valuation is compelling, trading at huge discount to peers (5.2 times EV/EBITDA versus 8.0 times for peers), and generating significant free cash flow.
LIQUOR STORES N.A. (LIQ.TO)
Most recent purchase last week at approximately $9.65 per share.
The largest liquor retailer in Alberta, Liquor Stores N.A. also operates in B.C. and Alaska. The company’s new management and board took over in mid-2017, making significant strategic progress. A turnaround is underway: The company is reinvesting in stores, reducing costs, improving inventory position and focusing on private label.
Liquor Stores announced the launch of a cannabis retail business in Alberta and B.C., offering a large opportunity with significant earnings potential (initial goal is to open 50 stores in 2018). They received strategic investment from Aurora Cannabis, with Aurora acquiring 20 per cent of Liquor Stores at $15 per share (a 55 per cent premium to the current share price). The company’s balance sheet is very strong and the valuation at current levels prices in almost no upside from the cannabis opportunity.
GREAT CANADIAN GAMING (GC.TO)
Most recent purchase last week at approximately $36 per share.
The largest Canadian gaming operator with over 20 properties in B.C., Ontario, Nova Scotia and New Brunswick, Great Canadian Gaming offers ttractive economics: high barriers to entry, a recession-resistant business, and an oligopoly/monopoly-type position in various markets. The company’s financial metrics are strong, with 20 per cent plus return on equity, a strong balance sheet and significant free cash flow generation.
The modernization of gaming in Ontario presents a significant growth opportunity. The company was awarded three licenses (Ontario East, GTA and GTA West). The current valuation doesn’t factor in significant long-term upside potential from holding a monopoly on gaming in Toronto for 22 years, an underserved gaming market and one of the largest cities in North America.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CAS | N | N | Y |
| LIQ | N | N | Y |
| GC | N | N | Y |
PAST PICKS: FEB. 15, 2017
CASCADES (CAS.TO)
- Then: $13.90
- Now: $12.85
- Return: -7.55%
- Total return: -7.55%
TEMPLE HOTELS (TPH.TO)
One-for-six stock split.
- Then: $0.90
- Now: $2.76
- Return: -48.88%
- Total return: -48.88%
IMVESCOR RESTAURANT GROUP – NOW MTY FOOD GROUP (MTY.TO)
- Then: $3.33
- March 5, 2018: $4.01
- Return: 20.42%
- Total return: 23.38%
Total return average: -11.01%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CAS | N | N | Y |
| TPH | N | N | N |
| MTY | N | N | N |
FUND PROFILE
JC Clark Preservation Trust
Performance as of: March 2018
- 1 Year: 2.42% fund, 5.21% index
- 3 Year: 3.07% fund, 4.75% index
- 5 Year: 5.30% fund, 7.40% index
* Index: S&P 500 + S&P/TSX
WEBSITE: jcclark.com
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