Full episode: Market Call Tonight for Tuesday, February 5, 2019
Gerard Ferguson, CEO and portfolio manager of Jemekk Capital Management Inc.
Focus: Canadian equities
The past seven months have been extremely volatile in global capital markets. Concerns over rising rates, tariffs, slowing economic activity in the U.S. and earnings deceleration came to a head in the fourth quarter of 2018. Yet all of these concerns have diminished, with the Fed backing off from its hawkish bias being the most important. One by one, the fears that jilted the markets in Q4 seem to have been dealt with.
The very strong move in January signals that the market has now discounted said improvements and most participants are anticipating a pullback from what was an historic move higher. To anticipate the direction of the markets for the rest of the year one has to put aside, but not forget, the issues highlighted. From a fundamental standpoint, markets look to be just on the cheaper side of fair value, something that has not occurred in many years. Although slowing, earnings growth is still positive and can provide a four to five per cent boost to the markets. If the Fed remains dovish and rates remain low, we could also see multiples expand by one to three points, something no-one has considered for years. That would provide a boost of six to eight per cent to markets. When coupled with the earning growth, it could result in a nice double-digit year from here.
AIR CANADA (AC.TO)
Air Canada recently reacquired their loyalty program in conjunction with credit card partners, which materially boosts their earnings before interest before interest, tax, depreciation and amortization (EBITDA) in addition to an expected boost in multiple, closer in line to their U.S. peers
From a catalyst perspective, the company should report their quarter soon (good numbers expected). It’s holding their annual investor day this month, which should give investors confidence in their strategy going forward.
Free cash flow (FCF) should accelerate in the next few years as, in addition to the Aeroplan reacquisition, their capital expenditure program decelerates. This will allow them to use ample cash for paying down debt, repurchasing shares and a possible dividend.
We feel the stock was overly sold off during its Q3/18 earnings over what we believe was a miss on simply deal slippage. The stock was off 25 per cent on a transitory issue. It has since bounced, but it’s still 20 per cent off its highs. We’re bullish going into its Q4 earnings in a few weeks.
The company has made some recent client wins such as Novartis and Unilever, along with partnering with E&Y. The deal slippage issue has been addressed with these wins, as Europe is where the company cited deal delays.
Investors need to understand Kinaxis is maturing and moving upmarket. Some of these larger deals (Novartis) require more due diligence adding to the sales cycle.
BAYLIN TECHNOLOGIES (BYL.TO)
Baylin had a major misstep when it IPO’d in 2013, losing its lead antenna position with Samsung. The stock sold off aggressively and deservedly so, calling for new leadership and a change in strategy. Today, we have a lot of confidence in the CEO, as he has diversified the portfolio away from mobile and towards infrastructure and embedded solutions, making some key acquisitions.
Two noteworthy acquisitions were Advantech and Alga, which add IP, new vertical channels and customers. We’re looking forward to seeing these businesses being integrated and for both revenue and cost synergies emerge.
We like Baylin for its diversified growth platform, new strategic M&A, operating leverage and potential market opportunity on the burgeoning 5G build, which we acknowledge is not for the near term as the company has a lot of runway in the LTE space alone.
PAST PICKS: SEP. 10, 2018
PARKLAND FUEL (PKI.TO)
- Then: $41.84
- Now: $37.71
- Return: -10%
- Total return: -9%
SANGOMA TECHNOLOGIES (STC.V)
- Then: $1.17
- Now: $1.45
- Return: 24%
- Total return: 24%
BROOKFIELD BUSINESS PARTNERS (BBU_u.TO)
- Now: $56.02
- Then: $43.76
- Return: -22%
- Total return: -22%
Total return average: -2%
Jemekk Long/Short Fund
The Jemekk Long/Short Fund is an alternative, multi-strategy investment vehicle that invests primarily in Canadian mid- and small-cap securities. The fund is focused on investing in securities with the objective of providing investors with consistent, positive, absolute returns. These investment goals will be met primarily through long and short investments in equities, convertible bonds, options and other capital market instruments.
Performance as of: Dec. 31, 2018
- 1 month: -3.2% fund, -5.4% index
- 1 year: -3.6% fund, -8.9% index
- 3 years: 8.3% fund, 6.3% index
Returns are net of fees.
TOP 5 HOLDINGS
- Pollard Bank Note
- Brookfield Business Partners
- Boyd Group Income Fund
- Polaris Infrastructure