James Telfser, partner and portfolio manager at Aventine Asset Management
Focus: Canadian equities

MARKET OUTLOOK

In July, we talked about seeing ample evidence of a global economic slowdown while at the same time the S&P and the TSX were near their nominal all-time highs. This created an environment where we stressed caution given the lack of liquidity in summer months. While some tweets on trade from the U.S. president acted as the catalyst for a 3 to 4 per cent pullback, we continue to tilt defensive given the further deterioration of economic data and the many caution flags we are seeing with respect to bond yields.

In our private client accounts, we continue to focus our efforts on positions that will thrive in this environment such as rate-sensitive low-beta stocks, positions with a higher probability of near-term catalysts and, as always, we’re building up our list of companies that we would like to add at more attractive valuations. For long-term focused investors, we see a handful of opportunities to deploy new capital, but for the most part we’re being very patient at current levels. Our investment process keeps us concentrated and as a result we can focus on short-term high conviction opportunities that tend to be uncorrelated with the major market indexes. We’ve been picking away at a number of these. but are trying to stay neutral with new money deployed (that is, we’re purchasing put option protection or pairing with shorts).

TOP PICKS

EMERA (EMA:CT)

Emera offers a compelling combination of growth and defence. The team here has executed exceptionally well over the years and has clearly demonstrated that they’re good stewards of investors’ capital. We would expect gains here to come from a combination of valuation expansion, dividend growth and organic growth. Interest rates globally remain depressed, which bodes well for the valuation of utilities and other interest-sensitive sectors. Emera is trading at 18-times expected earnings and has a dividend yield of 4.7 per cent. This comes with 95 per cent of their asset base being regulated or very predictable. Management recently reiterated their target for 4to 5 per cent dividend growth and 6 to 7 per cent earnings growth.

OPEN TEXT (OTEX:CT)

Open Text is a solid long-term investment with mid-single digit organic growth, substantial free cash flow growth and catalyst potential through acquisitions ($6 billion spent on 30 acquisitions in the last 10 years). Open Text trades at a significant discount to peers in the software space (11-times EBITDA versus peers at 17 to 18 times). While this discount has been driven by “lumpy” quarterly results over the years, we’ve noticed a change management focus on consistency, return on capital and organic growth which will help close this gap. We like the fact that annual recurring revenue makes up 75 per cent of total revenue, including cloud-based services, which in the recent quarter were up 14 per cent year-over-year. We also like that the business model of Open Text drives significant free cash flow. which helps drive the M&A cycle. If you think in years versus quarters with Open Text, we believe you will be rewarded with strong shareholder returns that will likely outpace the major indexes.

GDI FACILITIES (GDI:CT)

GDI is one of those great businesses that offers stability (recurring revenue), organic growth and significant catalyst potential. GDI provides services such as cleaning, food sanitation, hotel services, disaster recovery, technical and event support services and maintenance for offices, hospitals, institutional buildings, laboratories, shopping centers and airports. There are several elements to like here, including a recent inflection higher in organic growth ( up 11 per cent in Q4,  8 per cent  in Q1 and  7 per cent in Q2), very aligned management team with directors and officers owning 50 per cent of the shares outstanding and a free cash flow profile that provides flexibility. We also believe there will be further consolidation in the industry, which provides a significant opportunity for the shares to outperform. GDI has completed over 20 acquisitions since 2005. Taken together, we conservatively model a 15-per-cent internal rate of return over the next few years given managements targets and multiple expansion as this relatively underfollowed story attracts more attention.

PAST PICKS: OCTOBER 9, 2018

DESCARTES SYSTEMS GROUP (DSG:CT)

• Then: $40.24
• Now: $46.05
• Return: 14%
• Total return: 14%

BROOKFIELD ASSET MANAGEMENT (BAM-A:CT)

• Then: $56.13
• Now: $68.13
• Return: 21%
• Total return: 23%

PREMIUM BRANDS HOLDINGS (PBH:CT)

• Then: $90.03
• Now: $97.29
• Return: 8%
• Total return: 10%

Total return average: 16%

WEBSITE: Aventine.ca