James Telfser's Top Picks: Feb. 27, 2019

BNN Bloomberg

James Telfser , BNN Bloomberg

James Telfser, 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 and return standpoint versus a couple months ago. While financial conditions, breadth and credit metrics have all improved, many recent geopolitical risks have receded and we are more cautious about valuations at current market levels. We continue to hold a modest amount of cash in our accounts to take advantage of any dislocations to the seemingly “perfect” narrative we keep hearing. We will get more constructive on equities if we can get more comfort that global growth and earnings have bottomed, as currently it looks like Q1/19 estimates are expected to be negative year-over-year while Q2/19 is deteriorating as well.

Our private client accounts took advantage of the sell off over the last four months by adding to equity positions from our core Canadian and U.S. capital allocator model. We have also been taking advantage of the weakness in the Canadian preferred shares market as we believe a number of issues are now deeply oversold from the back up in interest rate expectations. We continue to stress patience as we add a number of great businesses to our watchlist and are waiting for volatility to pick up again to get more aggressive as valuations reach our entry levels.

TOP PICKS

EVERTZ TECHNOLOGIES (ET.TO)

Evertz is a global leader in the broadcast technology industry and they are positioned to disproportionately benefit from the upgrade cycle to cloud-based media delivery. The company has demonstrated exceptional internal returns and smart capital allocation practices over a long period of time and is trading at an undemanding valuation while yielding 4.5 per cent. We have a high probability 12-month expected total return for Evertz in excess of 25 per cent with the potential for additional upside from transaction-related catalysts. One interesting aspect of the company is the incredible alignment of interests as insiders own roughly 65 per cent of the firm.

ATS AUTOMATION TOOLING SYSTEMS (ATA.TO)

ATS is a custom engineer and producer of automated manufacturing systems. The current trends towards robotics and automation across all industries makes this a stock with significant tailwinds. We have been impressed with ATS from an operational and management team perspective as their current CEO, Andrew Hider, has refocused the organization on driving shareholder value. Their backlog has been very strong and we believe that recurring revenue is going to increase over the next few years through support services which will further stabilize their operations and increase margins. This along with their appetite for acquisitions should improve the valuation multiple which is current at a significant discount to peers at nine times expected enterprise value to earnings before interest tax depreciation and amortization (EV/EBITDA).

CCL INDUSTRIES (CCLb.TO)

CCL has been a great holding for us over the years and after watching the valuation for this label manufacturer fall from a peak at 27 times price-to-earnings (P/E) in 2016 to the current high-teens level, we believe it is time to start revisiting the name. They have struggled over the last few quarters, along with most packaging companies, as increasing resin prices and the general economic slowdown has impacted their growth trajectory as well as margins. Despite the short-term hiccups it is important to recognize that CCL is a best in class company with a strong management team and excellent prospects for both organic growth and acquisitions. CCL has done an exceptional job buying competitors and businesses operating in similar industries and helping them bring more of the “Best manufacturing practices” to their businesses while still encouraging and regarding local decision making. At the current valuation at 19 times this year’s earnings, coupled with a strong balance sheet (One times net debt to earnings before interest tax depreciation and amortization) we believe investors will be rewarded as the company executes going forward.