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

MARKET OUTLOOK

We believe the current investing environment is more balanced from a risk/return standpoint versus a couple months ago. While financial conditions, breadth and credit metrics continue to improve and many recent geopolitical risks have receded, we’re more cautious about valuations at current market levels. We continue to hold modest amounts of cash in our private client accounts to take advantage of any short-term volatility. However, given the bottoming of global economic data, the fact that the U.S. Federal Reserve has started expanding its balance sheet again and that there’s favourable comparative periods to next year, we’re more invested now than at any point during 2019.

Our private client accounts have been taking advantage of valuation discounts with small-cap non-resource equities in Canada and have increased their U.S. large-cap equity exposure through our large-cap dividend growth strategy. With interest rates looking like they will continue to stay lower for longer, we believe that owning large-cap diversified dividend growers in the U.S. (and Canada) over traditional fixed income assets is very attractive.

TOP PICKS

AKUMIN INC (AKU/U:CT)

Akumin has been executing well on their business plan of acquiring and operating diagnostic imaging clinics primarily focusing on MRI and CT Scans in the U.S. They’re now the number 2 player in North America behind RadNet, with 130 centres. Their business has several strong macroeconomic tailwinds, most notably demographics. Akumin should also benefit from operating leverage as they continue to scale. We expect strong volume growth as insurance companies encourage patients to utilize independent clinics versus the more expensive hospital centres. While growth has been robust (more than 50 per cent on revenue in the last 12 months), we’re even more impressed with the margin profile at more than 20 per cent on EBTIDA and their ability to integrate new acquisitions. Given their execution to date, we believe that the current multiple of 5.5 times EV/EBITDA is far too low and remains out of line with the peer group and other consolidators. We consider this level to be an excellent entry point as the next phase of their business plan unfolds, resulting in enhanced organic growth and free cash flow.

FIRSTSERVICE CORP (FSV:CT)

FirstService is the largest property management company in North America and is also a leading provider of property services. The management team has a long history of impressive capital allocation. We particularly like the fact that FirstService has several levers to pull for growth, both organically and through acquisitions. Given the stock price weakness following their Q3/19 results, we believe it is an attractive time to add FirstService to portfolios. The recent share price weakness was driven by difficult year-over-year comps from storm-related restoration work in the U.S. All other underlying business trends remain strong. While valuation is in line with historical levels, the recent correction has provided an opportunity. It is not unreasonable to expect 5 to 10 per cent organic growth and 5 to 10 per cent acquisition-oriented growth going forward, providing a very attractive return profile in a stable industry.

HEROUX-DEVTEK (HRX:CT)

Heroux-Devtek specializes in the design, development, manufacture, repair and overhaul of systems and components used in aerospace and industrial sectors. A large part of their business is focused on aircraft landing gear for both the commercial and military segments. The company is the no. 3 player globally by market share, but no. 1 by profitability. It is now an appropriate time to own the shares, as the company has recently completed a large capex program to support a major new contract and is integrating recent acquisitions (Beaver and CESA). We believe the company will now begin to realize the benefit of additional free cash flow, revenue and earnings. Expectations are currently very low and as a result we should see earnings beats and guidance raises, which have historically rewarded equity holders. The current valuation (8 times EV/EBTIDA) is at a discount to history and peers, a gap we expect it will close in the next few quarters.

PAST PICKS: MAY 7, 2019

EMERA (EMA:CT)

• Then: $50.60
• Now: $55.32
• Return: 9%
• Total return: 12%

OPEN TEXT (OTEX:CT)

• Then: $52.99
• Now: $56.12
• Return: 6%
• Total return: 7%

CCL INDUSTRIES (CCL/B:CT)

• Then: $55.56
• Now: $57.06
• Return: 3%
• Total return: 3%

Total return average: 7%

COMPANY TWITTER: @aventine_mgmt
PERSONAL TWITTER: @james_telfser
WEBSITE: aventine.ca