Colin Stewart's Top Picks: Sep. 10, 2018

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

MARKET OUTLOOK

We expect market volatility to increase going forward. Elevated risk of a global trade war, rising interest rates, historically high equity valuations and continued geopolitical risks will likely create more uncertainty for investors. While the global economic backdrop and corporate fundamentals remain relatively strong, we believe much of this good news is already reflected in stock prices. 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 with a focus on high quality companies. 

TOP PICKS

FAIRFAX FINANCIAL (FFH.TO)
Our most recent purchase was about one month ago at around $720 per share.

Fairfax is a property and casualty insurance company. The insurance operations are performing well, with a combined ratio of about 96 per cent.

• Its investment portfolio has been heavily weighted in cash, but it’s beginning to reinvest. LT track record is exceptional.
• It’s recently crystalized large gains on investments in Asia and India.
• The acquisition of Allied World provides significant growth and increased exposure to the U.S. market.
• Trading at only 1.1 time book value (a discount to the group).
• The recent pullback in share price provides a buying opportunity.

RECIPE UNLIMITED (RECP.TO)
Our most recent purchase was one week ago at about $29.50 per share.

Recipe Unlimited is one of the largest restaurant operators in Canada, with multiple banners such as Swiss Chalet, Harvey’s, Kelsey’s, St. Hubert and The Keg.

• It operates 17 banners and approximately 1,400 restaurants (85 per cent are franchised, 15 per cent are corporately owned).
• In May 2018, Frank Hennessey became CEO.  Frank is one of the top restaurant executives in the country and was responsible for the successful turnaround and sale of Imvescor to MTY Food Group.
• Recipe trades at 10 times EV/EBITDA (a large discount to U.S. franchised restaurant co.’s, which trade at 16 to 17 times).
• Same store sales growth and acquisition growth should drive a valuation multiple expansion.
• A strong balance sheet (2 times net debt to EBITDA) provides company dry powder to fund future acquisitions.
• The company owns some of the most iconic restaurant brands in Canada, a difficult collection of assets to replicate.

TERRAFORM POWER (TERP.O)
Most recently purchased in early August at close to $10.50 per share.

TerraForm is a renewable power operator with a collection of solar and wind assets in North America and Europe.

• A powerful, long-term secular trend towards renewables will provide long-term growth opportunities for TerraForm.
• The company was effectively recapitalized by Brookfield Asset Management. Brookfield now owns 65 per cent of TerraForm and provides a strong sponsorship.
• It recently acquired Saeta Yield, a renewable provider in Spain which is expected to provide attractive returns over time.
• Current dividend yield is 6.8 per cent. Management is also targeting a 5 to 8 per cent annual dividend growth.

PAST PICKS: OCT. 26, 2017

TRICON CAPITAL (TCN.TO)

We sold our Tricon position in the fund several months ago due to concerns over rising rates.

• Then: $10.81
• Now: $11.24
• Return: 4%
• Total return: 6%

POLARIS INFRASTRUCTURE (PIF.TO)

We continue to hold a position in the fund.

• Then: $16.67
• Now: $12.03
• Return: -28%
• Total return: -24%

GREENSPACE BRANDS (JTR.V)

We sold a portion of the position in March 2018. We still hold a modest-sized position in the fund.

• Then: $1.30
• Now: $0.88
• Return: -32%
• Total return: -32%

Total return average: -17%

FUND PROFILE

JC Clark Preservation Trust – Class B
Performance as of: July 2018

• 1 Year: -1.06% fund, 11.33% index*
• 3 Years: 1.76% fund, 7.29% index
• 5 Years: 4.86 fund, 8.27 index

* Index: S&P500 + TSX.
* Returns provided are net of management and performance fees.

WEBSITE: JCCLARK.COM