James Telfser, managing partner and portfolio manager at Aventine Investment Counsel

FOCUS: North American stocks

MARKET OUTLOOK:

Our equity portfolio maintains its near-fully invested stance, which hasn’t changed over the last seven to eight months. Our commitment to long-term value is underpinned by patience and confidence in our superior management teams and businesses. By adhering to these principles, we have been able to calmly navigate the market ebbs and flows, staying focused on the long term. This kept us busy last week on the buy side as we have been active with new positions and we remain prepared to further take advantage of any volatility in the weeks ahead.

For those with liquidity at their disposal, we advocate for an expansion of exposure through small caps and international equities, capitalizing on favourable valuations and growth prospects. Additionally, we maintain a vigilant eye on commodities given the resurgence of inflationary pressures, ensuring our portfolios are fortified to withstand these headwinds.

Presently, corporate earnings and global economic fundamentals display robustness, buoyed by a resurgence in manufacturing and industrial activities—an encouraging backdrop for risk assets.  However, despite our outlook remaining positive, we recognize the pivotal role of inflation in shaping the trajectory of markets.

Our medium-term forecast is contingent upon the evolution of these inflationary dynamics. Should inflation maintain its current trajectory, we anticipate a continuation of the favourable growth environment, reaffirming our fully invested positioning. Conversely, a pronounced uptick in inflation, particularly within the U.S., could precipitate a recalibration of monetary policy, potentially impeding growth and nullifying recent progress.

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TOP PICKS:

MDA (MDA TSX)

We believe growth in the space economy will be robust for many years to come. MDA is a pure player in this market and we believe has some exciting years ahead. The cost to launch a satellite has declined in a meaningful way, driving more and more businesses to utilize space for communications, observation, and other activities. This fact is key to our thesis and has driven predictions that this market can grow from $400 billion to more than $1 trillion in the coming years. MDA has some big launches coming up and a backlog of $3.1 billion and recent commentary suggests they have another $17 billion in the pipeline. Catalysts will be driven by new wins, free cash flow and proof that they can execute during the high growth years. The current valuation multiple of eight times next year’s EBITDA is much to low for the growth and margins we are expecting.

Microsoft (MSFT NASD)

Although it is difficult, if you can think five years out, it is hard to think of a company better situated than MSFT. Investors often like to talk about moats, however, in tech it is not always easy to appreciate. In this case, we prefer to look at a company’s installed base as a good proxy and in this case they have around 400 million commercial users. Microsoft is the industry standard for software applications, productivity which has stood the test of time and has maintained growth. It has a tremendous track record of developing and acquiring technology which it then incorporates into its software stack allowing it to further attract new customers and increase sales to existing clients as well. The stock has been rewarded for this and it is hard not to say that it isn’t reflected in its valuation (30 times P/E), however, when you consider the growth and profitability potential, we believe you are buying the stock closer to a market multiple. Azure alone could reach $200 billion in revenue by the end of the decade, which would double revenue, and due to operating leverage, nearly triple free cash flow, from current levels.

Arc Resources (ARX TSX)

We recently added ARX to client portfolios for core exposure to natural gas and liquids.  We believe the setup for LNG is attractive, but we were most attracted to the expected total shareholder returns. ARX has a very conservative, credible management team which increases the probability of recognizing the significant free cash flow growth we are projecting in the coming years (a triple to $4 per share). The current free cash flow yield is around 10 per cent and the stock is trading at a discount to senior E&P peers, a discount that we believe will slowly disappear.   

PAST PICKS: April 13, 2023

Nintendo (NTDOY OTC)

• Then: US$10.20
• Now: US$12.32
• Return: 21 per cent
• Total Return: 22 per cent

FirstService (FSV TSX)

• Then: $191.12
• Now: $213.07
• Return: 11 per cent
• Total Return: 12 per cent

Element Fleet Management (EFN TSX)

• Then: $17.79
• Now: $21.46
• Return: 21 per cent
• Total Return: 23 per cent

Total Return Average: 19 per cent