Gerard Ferguson, CEO and senior portfolio manager at Jemekk Capital Management Inc.
Focus: Canadian equities
Global capital markets, although trading near all-time highs, have recently begun to show pause and even weakness as fiscal and monetary policies shift to a tightening bias in the face of slow economic growth. A big concern for market participants is the shift in the policies that have driven markets to historically expensive levels, with near zero rates and Fed intervention reversing as the U.S. economy shows signs of growth.
As a firm, we view the market as expensive overall and as a result our short book has increased as 2017 has worn on. Based on most market metrics, it would appear the market is due for a pullback, or at the very least a pause, as earnings need to catch up to where multiples have taken stocks. Toss in uncertainty regarding Trump, Europe, North Korea and the nascent U.S. recovery, caution is warranted.
However, we continue to find opportunities from a long standpoint, as indicated below. The old axiom “it’s a stock pickers market” is overused, but is probably appropriate in this rising rate and moderate economic growth environment. In addition, we are witnessing significant rotation in the market, from growth/tech to value/late cyclical. As such investors should remain nimble and ride out what could potentially be head fakes in the late stage of the current rally.
AIR CANADA (AC.TO)
A long-term holding, Air Canada has generated intertest recently with the announcement of the impending launch of its own loyalty program.
The company is benefiting from the combination of low oil prices and recent strength in the Canadian dollar, which led management to revise analyst guidance significantly higher. It continues to trade at a discount to its North American peers and should benefit from the economic recovery in Canada which has shown recent signs of strength.
Next catalysts include second-quarter earnings, September investor day and the possible initiation of a dividend.
WPT INDUSTRIAL REIT (WIRu.TO)
WPT is a REIT specifically with a portfolio of industrial properties in the U.S. that focuses on warehouses and distribution centres.
This is a new name for the fund. We were attracted to it because the company is further expanding its U.S. footprint purchasing a distribution property in Houston and one in Portland, adding over 900,000 square feet total for a cost of US$96.4 million. We liked the deal and chose to buy because these centers are Class A facilities, have over 90 per cent occupancy rates, an average remaining lease term of over seven years and an attractive cap rate of 5.1 per cent.
We also see WPT as a play on the growth of e-commerce. The trend for bricks-and-mortar is in a secular decline while online shopping continues to grow at 15 to 20 per cent year-over-year. Warehouses and distribution centers will play a large role in e-commerce's growth.
THERATECHNOLOGIES INC (TH.TO)
Theratechnologies is a Canadian-based specialty pharmaceutical company focused on niche drugs for HIV patients. The company has one commercialized product, EGRIFTA, which is the only FDA-approved drug for lipodystrophy, a metabolic disorder related to HIV treatment. This drug provides a steady cash flow to support growth initiatives.
The primary reason we own the stock, however, is for the potential of a second drug to come to market that could prove to be a game changer. This drug, Ibalizumab, is for multi-drug resistant (MDR) HIV which we believe will receive approval later this year or early in 2018. As it stands, there is a scarcity of options for those who are MDR. We see Thera’s new drug solving this issue and experiencing a rapid uptake.
As the stock has had a strong run year-to-date, we caution investors there's a lot priced in and management must deliver on approvals. We have lightened up our position recently, but would add on any dips.
PAST PICKS: APRIL 4, 2017
BOYD GROUP INCOME FUND (BYD_u.TO)
Boyd Group is in the collision repair business as well as glass repair. Approximately 90 per cent of the company's revenue is from the U.S.
Since last speaking about Boyd, the company closed the acquisition of Assured Automotive. This was a sizable deal for the company ($194 million), making them the leader in the largest collision repair market in Canada.
This name has been in the fund since 2011 and we're still positive on the story.
- Then: $85.31
- Now: $95.99
- Return: +12.51%
- TR: +12.67%
POLARIS INFRASTRUCTURE (PIF.TO)
Polaris, the renewable energy company with an operating geothermal facility in Nicaragua, remains a holding in the fund. The company restructured in 2015 under a new CEO and with new capital to capitalize on their significant resource and existing geothermal project.
It recently reported a strong quarter and outlined multiple avenues for growth that include expanded capacity at their existing plant, future wells and new projects.
We continue to own the company.
- Then: $14.40
- Now: $16.81
- Return: +16.73%
- TR: +17.84%
NEW FLYER INDUSTRIES (NFI.TO)
New Flyer is a manufacturer of heavy duty transit buses in North America. We remain bullish on the company, as we see a favourable economic backdrop in the U.S. and transportation spending increasing, a strong and improving balance sheet, increased traction in the aftermarket business, further synergies realized from MCI and margin enhancements with robust free cash flow generation.
The company trades at a reasonable multiple and exhibits good growth opportunities
New Flyer is up strongly year-to-date, but has traded sideways since early May. We're not concerned with this and look forward to earnings in the second week of August for a catalyst.
- Then: $49.35
- Now: $55.09
- Return: +11.63%
- TR: +12.29%
TOTAL RETURN AVERAGE: +14.26%
FUND PROFILE: JAMEKK LONG/SHORT FUND
PERFORMANCE AS OF MAY 31, 2017:
- 1 Month: Fund 3.6%, Index* -1.5%
- 1 Year: Fund 17.4%, Index* 12.0%
- 3 Year: Fund 8.6%, Index* 4.7%
* Index: S&P/TSX
Returns provided are net of fees.
TOP 5 EQUITY HOLDINGS (BY WEIGHT, EQUITIES ONLY)
1. SHOPIFY INC: 4.9%
2. AIR CANADA: 4.2%
3. BOYD GROUP INCOME FUND: 4.0%
4. KINAXIS: 3.8%
5. SEVEN GENERATIONS ENERGY: 3.5%