James Telfser, partner and portfolio manager at Aventine Asset Management
Focus: North American stocks

MARKET OUTLOOK

We are once again getting conflicting signals from both the bond and equity markets. The TSX has recovered 36 per cent from the lows in March while the Canadian 10-year yield remains near its lows. The situation is similar in the U.S., with the S&P over 3,050 and the U.S. 10-year yield well below 70 basis points. Matters are further complicated by investors weighing fragmented economic reopening, flaring U.S.-China trade disputes, civil unrest, and the possibility of a second wave of COVIE-19 infections. Furthermore, the Federal Reserve seems to be attempting to battle unemployment by supporting risk asset prices, a questionable strategy at best. High-yield corporate bond ETFs have now recouped nearly three quarters of their decline earlier this year, while debt-adjusted equity valuation in the S&P 500 as measured by EV/LTM EBITDA is now at the highest level on record. We believe the market should be prepared for an extended period of elevated volatility and as a result we believe that active management is increasingly important. We remain defensively positioned yet active in this environment in order to capitalize on acute individual asset dislocations.

TOP PICKS

ATS Automation Tooling Systems (ATA TSX)

ATS is a custom engineer and producer of automated manufacturing systems. Current trends towards robotics and automation across all industries make 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 have been impressed with the recent life science wins which come with higher margins. 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 10x expected EV/EBITDA. 

Kinaxis (KXS TSX)

Kinaxis is a software company that provides solutions for planning and supply chain response management. Over the last five years they have consistently grown revenue by over 20 per cent and we believe their best days are still ahead given their strong bookings (up 40 perc cent y/y in Q1/20). With a global focus and growing addressable market we believe the stock should continue to trend higher along with sales, especially as recurring revenue becomes a larger percentage. Management was confident in their robust pipeline and commented that “there has never been more attention on global supply chain resilience and the need to respond to daily disruption.” We agree and as a result believe Kinaxis is a great addition to a portfolio to capture this growth.

Agilent Technologies (A NYSE)

Agilent is the world’s largest supplier of laboratory equipment worldwide, providing instruments, services, consumables, applications and expertise. Agilent has 20 per cent market share and the market is oligopolistic with the top 5 participants and accounting for 75 per cent. We think that the fallout of COVID-19 provides a significant and sustainable macro tailwind to Agilent. They operate globally and as individual jurisdictions begin to focus on domesticating pharmaceutical research and production, more and more investment will go into laboratory construction and improvement, and research. Furthermore, the company has done a fantastic job of increasing the proportion of revenue that is recurring, through high margin maintenance contracts and consumables, leading to 6% average annual organic growth over the past decade. Finally, the company has the lowest leverage in the peer group, so they are best able to withstand any uncertainty in the short term, however in the long term we believe they are actually undercapitalized, resulting in significant dry powder for investment.

Past Picks: May 7, 2019

Emera (EMA TSX)

• Then: $50.60
• Now: $55.03
• Return: 9%
• Total Return: 14%

Open Text (OTEX TSX)

• Then: $52.99
• Now: $58.19
• Return: 10%
• Total Return: 12%

CCL Industries (CCL/B TSX)

• Then: $55.56
• Now: $46.64
• Return: -16%
• Total Return: -15%

Total Return Average: 4%