Nov 24, 2017

Daniel Lloyd's Top Picks: November 24, 2017

BNN Bloomberg

Daniel Lloyd , BNN

Daniel Lloyd, portfolio manager at Forge First Asset Management
FOCUS: Canadian equities
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MARKET OUTLOOK

While we were admittedly too cautious regarding equities entering 2017, the year has yielded some interesting developments (both economic and political) that have pushed stocks ever-higher. Our current belief is that in spite of high valuations by historical standards and what appears to be widespread bullishness, markets should continue to grind higher in the absence of an exogenous shock. Still-easy monetary conditions, reasonable economic growth around the world and a lack of credible alternatives to stocks are likely to buoy equities for the time being.

That said, this is not the appropriate time in the cycle to be making levered or aggressive bets on stocks and we believe that focusing on specific high-quality companies and sectors with tailwinds should yield outperformance. For instance, we believe energy equities will play catch-up with the commodity and outperform over the coming months. Beyond making focused long investments, we believe it is very prudent to layer on downside production on any portfolio, so as to mitigate any losses that may be around the corner given the advanced age of this bull market.

TOP PICKS

TIDEWATER MIDSTREAM (TWM.TO)
Tidewater is a mid-cap name operating amidst much larger peers in the Canadian midstream (hydrocarbon processing) business. TWM trades at a substantially cheaper multiple (9x e2018 EBITDA) than those peers (think Keyera, Pembina and Inter Pipeline, which trade at an average multiple of 13.5x e2018 EBITDA). This valuation gap can largely be explained by the relative size of the companies; however, with a very devoted and highly capable management team and net debt of only 1.5x EBITDA at the moment, we believe Tidewater is set up to execute well on their growth plans, and as a result the stock should begin to re-rate towards the multiple enjoyed by its larger peers over time. Having recently commissioned a new natural gas processing plant in in the Pipestone area of the Montney, we believe there are multiple growth drivers for the company going forward.

PAREX RESOURCES (PXT.TO)
We believe Parex has a best-in-class management team, with assets, profitability and balance sheet all at an excessively low valuation of 5x cash flow. Parex has exceed our production growth expectations for 2017 and by February they should issue their annual reserve update, showing very strong year over year reserve growth. 2018 production guidance of >42,000 bbls/d indicates growth of over 20 per cent over 2017, and at current oil prices the company should generate substantial free cash flow to add to their already impressive net cash position on their balance sheet. We don’t believe there should be an aversion to investing in a Colombian-focused oil company, and Parex is a rare combination of getting what we think is the best company in the space at the cheapest valuation.

ALAMOS GOLD (AGI.TO)
We believe that Alamos is the premier mid-cap gold producer to own in Canada, particularly after having recently completed the acquisition of Richmont. With a large net cash position on the balance sheet and 2018 production guidance of greater than 500,000 ounces in Canada and Mexico - at what we believe should be an all-in sustaining cost of below $850 - Alamos should continue to generate substantial free cash flow to add to their cash hoard. Also, given that we believe at this point in the economic/market cycle it is wise to exhibit some caution, we believe some gold exposure is a reasonable way to own defensive assets should the market roll over.