February 8, 2018
Gerard Ferguson, CEO, Portfolio Manager, Jemekk Capital Management Inc.
FOCUS: Canadian Equities
_______________________________________________________________

MARKET OUTLOOK:

Risks in equity markets are increasing as valuations remain stretched in anticipation of stronger earnings as a result of improving economic growth, and the introduction of the tax plan in the US.  Currently markets are priced for near perfection and now need the follow-on impacts of the major tax plan the US is implementing to justify current levels.   However, here at home, Canada remains a laggard globally and is positioned for a catch-up trade at a minimum to the US as the outperformance south of the border is unlikely to continue (mid teen per cent US outperformance in 2017 and an additional 7 per cent plus in the month of January alone).

Importantly, one of the more significant changes in the last 6 months is the increase in rates providing an alternative for those hiding in equity markets as they believed there was no alternative (TINA).  Clearly the equity markets are showing signs of bubbles across many sectors.  Here in Canada we are witnessing it across the cannabis and blockchain/crypto sectors as retail enthusiasm remains unbridled until just recently. 

However, many areas of the Canadian market remain under-owned and unloved and MAY provide some relative shelter in the event that markets correct, such as resources and areas of the industrial economy.  In the meantime, we expect the consumer and technology sectors to continue to provide the support to Canadian markets they delivered in 2017.

As a firm we have begun to reduce exposures and are more focussed on preservation of capital than growth at this point.  As rates rise and volatility increases it is important to remain nimble and increase focus on liquidity and leverage in the portfolio and our holdings.

TOP PICKS

Stelco Holdings (STLC.TO)
Recently emerged from bankruptcy proceedings as one of North Americas leading integrated steel producers of premium quality coated, cold and hot rolled steel products
Company has significantly improved its balance sheet (essentially debt free), pension obligations (transferred pension and OPEB liabilities to a third-party trust) and negotiated friendly union contracts for the short to mid term.
Company is very reasonably valued and now re-focussed on growth through re-establishing contracts with old customers (auto), introducing new products and inorganic growth through acquisitions.

Pollard Banknote Limited (PBL.TO)
With a history dating back to 1907, Pollard entered the lottery industry in 1985 and is now the largest provider of instant win scratch tickets in Canada.
We purchased the stock after the INNOVA Gaming acquisition as we felt this was a material win for PBL (note: INNOVA was a $40mm deal that expanded PBL’s geographic footprint and provided the addition of gaming machines and ticket dispensers)
We are bullish on the gaming industry and view PBL as a large player (#2 in mkt share) in a lucrative market with high barriers to entry. Along with growing organically we see more M&A to complement the overall growth profile for Pollard. Not only does further M&A reduce concentration risk, these deals could prove to be synergy rich as INNOVA is expected to be. Just last week PBL made another acquisition with attractive deal metrics and subsequently did a bought deal which we participated in. This will help with liquidity.  

GrubHub (GRUB.N)
GRUB is a leading online platform for both delivery and pick-up orders. Online delivery market in 2017 was a US$20b industry expected to reach US$55b by 2022 implying a 23 per cent CAGR.
GRUB is our play on millennials and presents a favorable growing demographic as we see as the younger generation enters the workforce ordering food online will be second nature and even more of a convenience as their families grow.
GRUB has grown organically and inorganically with some recent sizable acquisitions (Eat24, Foodler, OrderUp) which further solidify its number one market share in the delivery marketplace (GRUB is 3.5 times larger than its nearest competitor with 50 per cent more supply). That said, we are mindful of the increasing competition in the space by large players such as Amazon and UberEats).
We are not full position on the stock because we are expecting some noise around the next quarter (reports Feb 8th) with the integration of the new platforms and the possibility of soft guidance from management attempting to set the bar low for the year.