Don Lato, president of Padlock Investment Management
FOCUS: North American equities
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MARKET OUTLOOK

Markets, particularly south of the border, have got off to a very strong start in 2018. In spite of that — and somewhat because of that — Padlock remains constructive in its outlook for equities this year. With the strong start, talk of a market melt up have begun, and that is not something to be ruled out.

We are entering the late stages of the bull market that started in 2009 and there are anecdotal warning signs, such as TD Ameritrade offering 24 hour trading, but it is often in those late stages where returns can be as large as bubbles are formed. Noted investor Jeremy Grantham, who was bearish ahead of the tech and housing bubbles, recently penned a very strong piece suggesting we are not yet at the time to be bearish in this market.

TOP PICKS

ROOTS CORPORATION (ROOT.TO)
There was immediate carnage after Roots Canada’s initial public offering (IPO) at $12.00 last October. The stock traded down immediately before bottoming in early November, a start not dissimilar to Sleep Country’s initial trading back in July 2015. I was originally skeptical of an investment in Roots, but after assessing a research report from Patricia Baker at Scotia Capital in early December, I was convinced of the merits of this company. Roots has a multi-pronged approach to growth, largely based on a significant turnover of senior management from the original founders, to a seasoned management team parachuted in to the company by the U.S. private equity firm, Searchlight Capital.  Roots was founded by Don Green and Michael Budman in 1973 and a majority stake was sold to Searchlight in 2015. Baker’s report calls for earnings of 72 cents per share this year and 90 cents in 2019. With a price/earnings ratio of 15.4 times and earnings growth projected to be 25 per cent next year, the stock trades a very good PEG ratio (PE divide by growth rate) of 0.6.

APPLIED MATERIALS (AMAT.O)
AMAT has steadily risen over the last couple of years as it has continually made inroads into many new and exciting applications for its chips and we expect that to continue. The four major growth themes in technology today are big data, artificial intelligence, the internet of things, and enhanced smart phone functionality and AMAT has products and strong growth profiles in each of these areas.  According to estimates compiled by Zack’s, AMAT is expected to grow earnings by 24% but only trades a price/earnings multiple of 14.1 times 2018 earnings for a PEG ratio of less than 0.6.

APPLE (AAPL.O)
This long time holding, in spite of being recently trimmed, is still the largest holding in Padlock’s portfolios. Apple will announce results on February 1st, and as is usually the case, analysts have become cautious about those results and the stock has sold off slightly from the all-time highs reached last week. The biggest surprise might be on the ever-expanding services revenue, which continues to become more meaningful to Apple’s overall results. In spite of the strength in the past year, Apple still trades at only 15.8 times this year’s earnings.

PAST PICKS: JANUARY 24, 2017

PAREX RESOURCES (PXT.TO)

• Then: $15.56
• Now: $19.44
• Return: 24.93%
• Total return: 24.93%

BORGWARNER (BWA.N)

• Then: $40.43
• Now: $56.32
• Return: 39.30%
• Total return: 41.09%

WINNEBAGO INDUSTRIES (WGO.N)

• Then: $31.35
• Now: $51.85
• Return: 65.39%
• Total return: 67.16%

TOTAL RETURN AVERAGE: 44.39%