Jun 9, 2021

James Telfser's Top Picks: June 9, 2021

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James Telfser's Top Picks

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James Telfser, partner and portfolio manager at Aventine Investment Counsel

Focus: North American Stocks

MARKET OUTLOOK:

As we look to the second half of the year, we continue to see a well-balanced market that is set to favour equities over many other asset classes, especially traditional fixed income. Inflation is the current mesmerizing worry, and one, which we believe, will stabilize as the strong post-pandemic acceleration in growth levels off. We are beginning to favour growth over cyclicals, as we believe the strong rally in commodities may pause, which will bode well for sectors that have struggled so far in 2021.

At Aventine, we tend to focus on idiosyncratic factors given our passion for individual stock selection and we continue to see a gradual improvement in confidence resulting in higher spending, and an inevitable release of pent-up consumer demand. While there is always a risk that expectations have gotten too high, after Q1-21 earnings season, we remain much more confident in our portfolio construction and look forward to the resulting impact of higher medium term economic growth.

TOP PICKS:

James Telfser's Top Picks

James Telfser, partner and portfolio manager at Aventine Investment Counsel, discusses his top picks: Trisura Group, Airboss of America and Sangoma Technologies.

Trisura Group (TSU TSX)

Trisura Group is a holding company consisting of three segments: Trisura Canada - a specialty insurer, Trisura U.S. – a fronting insurer that cedes almost all premiums to reinsurers except for a small part that it retains on its books, and Trisura International - a reinsurer that recently resumed underwriting. The company was spun out from Brookfield Asset Management in 2017 and has grown impressively into a highly profitable specialty insurance group. The most impressive growth continues to be from Trisura U.S. where management has found a niche opportunity in the fronting market. Furthermore, the more traditional Canadian operations have been recording better-than-expected revenue growth and underwriting profitability. We believe the company continues to have staggering growth potential, and the next leg will be debt funded thereby significantly reducing cost of capital and increasing shareholder returns.

AirBoss of America (BOS TSX)

Airboss, a diversified rubber compounding business, has undergone a dramatic transformation recently and we believe their best days are still ahead. The management team have made some astute capital allocation decisions by focusing on fostering relationships in the defense market through their acquisition of CSI in early 2020. The balance sheet has improved substantially (currently debt-free), free cash flow has increased, and most importantly, their bid universe has multiplied. While the shares have responded well to new contract wins, we still see them as dramatically undervalued, especially when compared to the peer group. Airboss has many near-term catalysts and with the market cap hovering around $1 billion, we believe a rerating may be imminent.

Sangoma Technologies (STC TSX)

As the unified communications market has evolved, Sangoma has been active in M&A and adapting internally in order to remain a top player. Their recurring revenue base has increased substantially along with their cloud presence. They have achieved all of this without sacrificing their industry leading financial metrics. Sangoma recently completed the acquisition of Star2Star, their largest transaction to date, to further solidify their market position. While the market is taking its time digesting the news of this deal, we believe that the next few quarters will demonstrate the added benefits of scale and will help close Sangoma’s large peer-group valuation discount. The management team clearly agrees as they have been buying this recent dip in the share price as well.