Colin Stewart, CEO and portfolio manager at JC Clark Limited
Focus: North American large caps

MARKET OUTLOOK

While current economic fundamentals are reasonably healthy, we also believe that risks for investors are increasing. We’re late into a prolonged economic expansion and equity market rally. Investor sentiment is widely positive and risk-taking is alive and well, with increasing evidence of speculative behaviour. Valuation levels are also high by almost any traditional measure. These conditions exist despite a very uncertain political backdrop (the 2020 U.S. election, Brexit) and the continued risk of global trade tensions. While we’re not necessarily calling for an imminent end to this bull market, we do believe now is the time to begin preparing for tougher days ahead.

TOP PICKS

INFORMATION SERVICES (ISV TSX)
Most recently purchased last week at approximately $14.60.

Information Services operates the land registry business in Saskatchewan in addition to a services and technology business that provides software to financial and legal customers. The company has a high-quality recurring revenue stream, operates in a monopoly-type position in its land registry business and has grown steadily organically and through acquisitions. The company generates high EBITDA margins, a high return on invested capital and significant free cash flow. Despite these attractive characteristics, the stock trades at only 6.5 times EV/EBITDA (2020E) and offers a 5.4-per-cent dividend yield.

NEW LOOK VISION GROUP (BCI TSX)
Most recently purchased in December at approximately $32.

New Look is a leading provider of eye care products and services in Canada with a network of 379 retail stores. The company operates in an attractive industry that benefits from an aging population, stable recession-resistant demand, a growing prevalence of vision issues among young people and more focus on premium products. New Look has a strong competitive position due to its large scale, which enhances purchasing power and improves margins. The company has a history of strong growth in both revenue and profitability. It has grown aggressively via acquisition in a fragmented market. New Look continues to have excellent growth prospects as it consolidates the eye care market in Canada and expands into the U.S. The valuation is also attractive at only 10.8 times EV/EBITDA (a significant discount to global peers).

CANFOR (CFP TSX)
Most recently purchased in mid-January at approximately $12.50.

Canfor is a leading integrated forest products company, primarily involved in the lumber business with assets in Canada, the U.S. and Europe. After a significant decline in lumber prices during 2019, we believe industry fundamentals are poised to significantly improve in 2020 and beyond. With strong U.S. housing starts leading to healthy demand for lumber and a significant supply curtailment over the last 12 months (a 4 to 5 per cent reduction in North American lumber capacity), lumber prices are poised to move higher. After a failed privatization effort by large shareholder Jim Pattison, Canfor’s share price recently came under significant pressure, creating an attractive opportunity for investors. Using mid-cycle EBITDA and a reasonable 6.5 times multiple, we believe Canfor offers investors at least 25 to 30 per cent upside from its current share price.

PAST PICKS: FEB. 5, 2019

MAPLE LEAF FOODS (MFI TSX)

• Then: $30.31
• Now: $26.00
• Return: -14%
• Total return: -12%

FAIRFAX FINANCIAL (FFH TSX)

• Then: $644.48
• Now: $589.93
• Return: -8%
• Total return: -7%

ATS AUTOMATION (ATS TSX)

• Then: $16.21
• Now: $20.72
• Return: 28%
• Total return: 28%

Total return average: 3%

WEBSITE: jcclark.com