Gerard Ferguson, CEO and senior portfolio manager at Jemekk Capital Management Inc.
Focus: Canadian equities

MARKET OUTLOOK

Following a very difficult fourth quarters, markets have bounced back strongly in the first half of 2019, posting one of the best starts to a year in decades. Markets have been propelled higher by a number of factors, the most important of which is the sentiment change when it comes to the Fed’s rate direction. Also contributing to the move is a belief that the tariff concerns dogging the markets over the past six months are closer to a resolution.

Although we don’t believe interest rates need to move lower, it seems that if they cut before rising rates, the Fed would like to avoid making the same mistakes that occurred in Q4 of last year. Still, trade concerns remain and are material. The longer the China-U.S. conflict continues, the less favorable the outlook for earnings and global growth appears. However, against the backdrop of reasonable valuations and a changing political environment as we march towards an election cycle in the U.S., we remain comfortable that risks in the markets remain balanced and thus we remain neutral in our positioning.

TOP PICKS

WHEATON PRECIOUS METALS (WPM.TO)

Wheaton operates as a precious metal streaming company, geographically diversified across multiple mines and metals. The company gives investors exposure to precious metals pricing (predominately silver), in addition to growth through its portfolio of royalty deals that become economic as prices rise.

The stock is reasonably valued, trading at a discount to peers and specifically to Franco-Nevada, a long term holding of the fund. Wheaton has successfully put its CRA issues behind it, in addition to working through political and operating issues at its partners’ mines.

EVERI HOLDINGS (EVRI.N)

Everi is a jack-of-all-trades when it comes to casino operations, with two primary business segments: Casino games (it licenses and sells gaming machines to casinos) and fintech. A primary part of the fintech segment is the cash access unit, where the company provides cash advances, ATM services and check warranties.

The company is enjoying impressive growth from each business segment, with a multi-year runway producing a healthy free-cash-flow profile. Investors should be aware of the company’s debt outstanding (net debt to EBITDA of four times), but with the free cash flow growth we’re expecting, we’re comfortable with the debt load.

From a catalyst standpoint, there were reports in May the company hired a financial advisor to explore the sale of either one of their business units or the whole company. We always felt the two business segments are trading at a steep discount and this event will unlock material value for shareholders. We should caution this is not a sole reason to own the stock, as nothing could materialize.

BOYD GROUP INCOME FUND (BYD_u.TO)

Boyd is the largest public operator of auto collision repair centers with a strong presence in North America. The company has performed very well year-to-date and although there are both industry and company headwinds (technician shortages, weather issues, and a recent ransomware attack), we feel the company will continue to grow both organically and inorganically and that it’s led by one of the best management teams we have ever met.

Valuation (13 times EBITDA) does not worry us, given the rich growth profile and multi-year runway the company still has. The stock has been a long-term holding for us and will continue to be based on its proven track record. Some felt Caliber’s acquisition of ABRA was a headwind for Boyd, but we see it as a tailwind as the new company is distracted with integration and has a levered balance sheet while Boyd remains focused on M&A and has the dry powder to act. We acknowledge there will be quarterly fluctuations, but we see past that and own the company for the long term.

PAST PICKS: FEBRUARY 5, 2019

AIR CANADA (AC.TO)

• Then: $31.21
• Now: $44.28
• Return: 42%
• Total return: 42%

KINAXIS INC. (KXS.TO)

• Then: $79.94
• Now: $80.90
• Return: 1%
• Total return: 1%

BAYLIN TECHNOLOGIES INC. (BYL.TO)

• Then: $4.01
• Now: $3.48
• Return: -13%
• Total return: -13%

Total return average: 10%

WEBSITE: www.JEMEKK.com