Full episode: Market Call Tonight for Monday, September 10, 2018
Gerard Ferguson, CEO and portfolio manager at Jemekk Capital Management Inc.
Focus: Canadian equities
Capital markets (particularly in the U.S.) have remained strong in 2018 with the S&P 500 up 7.5 per cent, leading most developed markets. Canada (S&P/TSX) by contrast is relatively flat, weighed down by its resources and its relatively minor exposure to the growth areas of tech and consumer stocks.
Much of the strength in the U.S. equity markets can be attributed to strong earnings growth as a result of the tax measures implemented by the Trump administration and their impact on the economy as a whole south of the border. Although many of the benefits of reduced taxes are yet to be felt, the expectation of rising corporate profits, improved consumer spending (as a result of an impressive unemployment picture) and increased capital spending have pushed stocks higher. Outside of the U.S., particularly in Canada, the picture hasn’t been as bright. Mediocre global growth (and their impact on resource prices), trade wars and rising geopolitical tensions have weighed on our market, as Canada’s competitiveness with respect to our southern neighbour deteriorates.
Yet we remain bullish on Canada for the following reasons:
- We’re currently experiencing the longest bull market in history, which would suggest we’re later in the cycle, an environment that typically favors Canada.
- The apathy towards Canadian equities, particularly resources, is at unprecedented levels.
- The Canadian economy and corporate earnings remain strong even in the face of the imposition of tariffs and the trade war with the U.S.
- Over the next 12 months, we expect to see a resolution with respect to the free trade agreement, a lessening of trade tensions and a federal election in which issues such as tax and regulatory changes must be considered.
PARKLAND FUEL (PKI.TO)
An acquisitive company, Parkland markets and distributes fuel-related products in North America, primarily in Canada.
- It’s been a big beneficiary of the recent acquisitions of CST Canada (a necessary disposition by Couche-Tard as a result of their acquisition of CST) and Chevron Canada’s retail network, including a refinery in B.C.
- The company has significantly beat estimates in the previous quarters and we would expect that to continue when they report their next quarter in November, aided by synergies from recent acquisitions and from wider than expected crack-spreads from their refinery business.
- The company remains undervalued compared to its peers and its growing at a faster pace. We would expect additional acquisitions, particularly in the U.S., to fuel the growth going forward.
SANGOMA TECHNOLOGIES (STC.V)
Sangoma is a global provider of unified communication hardware and software, which is a market expected to grow by 15 per cent yearly driven by a shift from hardware-based PBX (private-based exchange) to cloud-based services.
- The company continues to capture a greater share of its customers’ wallets. It used to get $5,000 of a $50,000 job, but is now competing for the entire $50,000.
- Growth is being driven by acquisitions and organically. It just closed a game-changing acquisition where it bought a direct competitor, Alabama-based Digium. The pushback from the Street is that Digium’s EBITDA is flat, but we see this as an opportunity for a seasoned M&A team like Sangoma to turn the $30 million in sales they acquired into cash flow, along with the removal of a direct competitor, the revenue and cost synergies and the opportunities to cross-sell and increase prices.
- It’s trading at 4.5 times 2019 EBITDA. We bucket Sangoma as a value play with plenty of upside potential. Recall that Mitel was taken out at 9 times EBITDA.
BROOKFIELD BUSINESS PARTNERS (BBU_u.TO)
Brookfield Business Partners operates as a business services and industrials company focused on long-term capital appreciation in a manner that replicates private equity.
- Leveraging the financial and intellectual capital of the Brookfield team, the company has thus far invested in several different industries, including facilities management, construction, industrials and energy.
- The company has exhibited true private equity characteristics, taking substantial interests in many companies and shown a desire to maximize value by liquidating at appropriate values either fully (Quadrant Energy) or partially (as recently exhibited by the IPO of Graftech).
- The ability to recycle proceeds into unique situations globally with the backing of a world-class management team is rare in the Canadian marketplace. Examples of current holdings include the jointly held casino license in Toronto acquired in the spring of 2018 with Great Canadian gaming, the Mobil gas station network in Canada and Westinghouse Electric out of bankruptcy.
PAST PICKS: FEB. 8, 2018
STELCO HOLDINGS (STLC.TO)
- Then: $23.32
- Now: $22.97
- Return: -2%
- Total return: 6%
POLLARD BANKNOTE (PBL.TO)
- Then: $19.30
- Now: $20.60
- Return: 7%
- Total return: 7%
- Then: $89.04
- Now: $141.01
- Return: 58%
- Total return: 58%
Total return average: 24%
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 and 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 Aug. 31, 2018
- 1 Month: 1.8% fund, -0.82% index*
- 1 Year: 15.56% fund, 10.08% index
- 3 Year: 12.20% fund, 8.65% index
* Index: S&P/TSX.
* Returns provided are net of fees.
TOP 5 HOLDINGS AND WEIGHTINGS
- Boyd Group Income Fund
- The Stars Group Inc.
- Parkland Fuel Corporation
- Brookfield Business Partners
- GrubHub Inc.