James Telfser, Partner & Portfolio Manager at Aventine Management Group

Focus: Canadian Equities

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MARKET OUTLOOK:

When we look at the Aventine Canadian Equity Fund, we couldn’t be more excited about the prospects for our portfolio companies. Our average holding is expected to grow per share earnings by greater than 20 per cent in 2016 while the portfolio trades at less than 11 times.  Given the expected catalysts we see on the horizon coupled with multiple expansion opportunities the logic behind our positive outlook should be clear.

Notwithstanding specific uncertainties relating to market valuation concerns and the EU referendum in Britain, we expect to see price trends in the Canadian stock market to remain positive. While the exceptionally strong rebound this spring should moderate through the quieter summer months we continue to view the balance of risks as supportive for stocks. Flow of funds data suggests that despite the recent rally investors remain underweight equities and investor sentiment remains depressed as measured by the major surveys. With the major central banks in a holding pattern until September at the earliest and economic data improving sequentially, it appears as though the right ingredients exist for markets to grind higher and we are positioned accordingly.

Top Picks:

FirstService (FSV.TO)

FirstService is a high quality Canadian business that operates principally as a property manager, but that also owns and franchises several complementary businesses including California Closets, Paul Davis Restoration and Century Fire Protection.  We believe FirstService has an excellent opportunity to generate annualized double-digit revenue growth over the coming years through a combination of organic business development and acquisitions.  We have been very impressed with management’s ability to successfully make strategic investments and have confidence that this trend of smart capital allocation will continue in the future.  We also expect that as FirstService continues to grow, positive operating leverage in the business model will enable margin expansion and further strengthen earnings performance at the bottom line. All of FirstService’s core business lines operate in recurring revenue industries populated by large numbers of relatively small private and family-owned competitors, which provide very attractive consolidation potential.

ZCL Composites (ZCL.TO)

ZCL Composites is in the fluid containment business, building tanks for petroleum, water and other liquid products that require safe storage throughout North America.  They operate as an industry leader in the downstream petroleum tank market (gas stations) and over the years have entered adjacent markets to diversify the business.  We believe that the company could expand into a number of new business verticals that would provide steady growth without requiring much capital investment. ZCL’s business operations generate a free cash flow yield in excess of 8% and with no debt on the balance sheet management is in a great position to take advantage of new opportunities or return capital to shareholders. On this second point, ZCL has recently become quite shareholder friendly having announced opportunistic share buybacks along with paying a $0.50/share special dividend. 

Heroux-Devtek (HRX.TO)

Heroux-Devtek specializes in the design, development, manufacture and repair of aerospace and industrial components for military and commercial customers.  A large part of their business is focused on aircraft landing gear, where they are the number three player globally by market share (but number one by profitability). The management team is very well aligned with shareholders and they have proven to be great capital allocators over the past few decades.  We believe that now is an appealing time to own shares as they have just finished a major capital spending program to support a new landing gear contract with Boeing. As deliveries on these new components ramp up, investors in Heroux-Devtek will benefit from rising revenues, earnings and free cash flow.   

Disclosure Personal Family Fund/Portfolio
 FSV Y  Y  Y 
ZCL   Y Y  Y 
HRX  Y  Y  Y 

 

Past Picks:  June 17, 2015

Goeasy (GSY.TO)

  • Then: $19.88
  • Now: $18.78
  • Return: -5.53%
  • TR: -3.33%

Mitel Networks (MNW.TO)

  • Then: $11.29
  • Now: $8.44
  • Return: -25.24%
  • TR: -25.24%

Clearwater Seafoods (CLR.TO)

  • Then: $12.34
  • Now: $14.00
  • Return: +13.45%
  • TR: +15.14%

Total Return Average: -4.48%

 

Disclosure Personal Family Fund/Portfolio
EH Y Y Y
MNW N N N
CLR Y Y Y

 

Fund Profile

Aventine Canadian Equity Fund

Performance as of: May 31, 2016

1 month: Fund 3.6%, Index*1.0%

1 year: Fund 5.3%, Index*-3.3%

Since Inception Annualized (March 31, 2014): Fund 9.9%, Index*2.1%

* Index: S&P/TSX Composite Total Return Index

* All returns are net of fees and we reinvest dividends.

 

Top Holdings

  1. Clearwater Seafoods Inc. – 6.8%
  2. New Flyer Industries Corp. – 6.5%
  3. Concordia Healthcare Corp. – 6.5%
  4. Goeasy Ltd. – 5.5%
  5. Winpak Ltd. – 5.0%

 

Company Twitter Handle: @aventine_mgmt

Personal Twitter Handle:@james_telfser

Company Website: Aventine.ca

Blog: Aventine.ca