James Telfser, partner and portfolio manager at Aventine Investment Counsel

Focus: North American stocks

MARKET OUTLOOK:

Markets love to worry. There are always new issues that mesmerize us in the short term. At the moment the focus remains centred around interest rates, hedge fund leverage, and the Reddit army of retail traders. In our opinion, it remains favourable to have an overweight position in equities relative to traditional fixed income or cash.

At Aventine, we tend to focus on idiosyncratic factors given our passion for individual stock selection and we continue to see a gradual improvement in confidence resulting in higher spending, and an inevitable release of pent-up consumer demand. While there is always a risk that expectations have gotten too high, we remain confident in our portfolio construction and look forward to the resulting impact of higher medium term economic growth.

TOP PICKS:

Taiwan Semiconductor (TSM NYSE)

Contrary to what Econ 101 would have you believe, demand is more important than supply. The global shortage of semiconductors is a demand driven problem. Taiwan Semiconductor (“TSMC”) is arguably the most influential semiconductor manufacturer in the world, and we believe that the global supply/demand imbalance in semiconductors is here to stay making this an interesting time to consider adding this exposure to your portfolios. Governments are beginning to realize that the supply chain for essential products can no longer be outsourced making the availability and sourcing of technology now a national security issue. TSMC is investing in the semiconductor supply chain more than any other company globally and we believe that this is the best use of capital and that their pricing power is being underappreciated by the market. We believe we could see exponential growth in demand in the coming years for their products which will drive higher profitability and free cash flow.

Heroux-Devtek (HRX TSX)

While it has been a tough year for the commercial aerospace market, we believe the next few years will show a robust recovery. On the other hand, the global defence market has been quite resilient and has seen new contracts grow over the last year. This has helped companies like Heroux-Devtek, who manufacture landing gear kits and other parts for the broad aerospace market, weather the commercial storm. Investors were pleasantly surprised by this management team in 2020 as they demonstrated their operational prowess and came out of the year in great shape with significant free cash flow generation (12 per cent free cash flow yield) and robust margins. Heroux-Devtek's valuation is very compelling at less than 10X our 2021 EBITDA, a level that is 5-6 turns less than U.S. peers. 

CCL Industries (CCL/B TSX) 

We have been following CCL, a global specialty packaging company, for close to a decade and are continually impressed with their best-in-class management team.  CCL has dealt with several challenges recently, including supply chain disruptions, commodity price inflation, and a pandemic. However, we believe the company will exceed expectations in 2021 as supply chains restock and we experience some of the most robust economic growth in years. CCL is a “GDP plus” type grower that has also been known to execute both transformative and tuck-in acquisitions, which we expect to continue moving forward. With the stock trading a hair above 2017 levels, combined with improving fundamentals, we believe the stock represents a compelling opportunity. Valuation is undemanding with a current EV/EBITDA of 12x and our expectation that estimates will rise as the year progresses.

PAST PICKS: June 3, 2020

ATS Automation Tooling Systems (ATA TSX)

• Then: $19.32
• Now: $28.86
• Return: +49%
• Total Return: +49%

Kinaxis (KXS TSX)

• Then: $174.37
• Now: $158.69
• Return: -9%
• Total Return: -9%

Agilent Technologies (A NYSE)

• Then: $90.49
• Now: $133.02
• Return: +47%
• Total Return: +48%

Total Return Average: +29%

Company Twitter handle:  @aventine_mgmt

Personal Twitter handle: @james_telfser

Company website: Aventine.ca