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

MARKET OUTLOOK

There can be no doubt that we are late in the cycle at this point, which dramatically increases the importance of both asset and sector allocation. It is our view that the risk of inflation and geopolitical tensions are some of the most mispriced market factors at play. In fact, although headline inflation remains flat, the price for healthcare, property and education (three things that allow for middle class life) are up dramatically. While capex is currently in a recession, domestic consumption remains high and savings rates remain elevated, which leads us to believe that the services sector will not fully “catch down” to the goods sector.

At the same time, the Fed has once again started expanding its balance sheet. As a result, we are more invested than we have been in previous quarters and remain focused on companies with the ability to grow the top line, that have strong balance sheets and with good coverage ratios and high barriers to entry. Notably, trailing three-month volatility is now near 52-week lows and we have been opportunistic in adding downside protection through options across our portfolios. This allows us to meaningfully participate in the market’s upside while limiting drawdowns through year-end.

TOP PICKS

EMERA (EMA:CT)

Emera offers a compelling combination of growth and defence. The team here has executed exceptionally well over the years and clearly demonstrated that they’re good stewards of our investors’ capital. We would expect gains to come from a combination of valuation expansion, dividend growth and organic growth. Interest rates globally remain depressed, which bodes well for the valuation of utilities and other interest-sensitive sectors. Emera is trading at 18-times expected earnings and has a dividend yield of 4.7 per cent, with 95 per cent of their asset base being regulated and predictable. Management recently reiterated their target for 4 to 5 per cent dividend growth and 6 to 7 per cent earnings growth.

AKUMIN (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 are 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 are even more impressed with the margin profile at  over 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 enterprise value to EBITDA is far too low and 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 even more organic growth and free cash flow.

CAE (CAE:CT)

CAE is a global leader in training for the civil aviation and defence markets. They are an impressive dividend grower (over 10 per cent compound annual growth rate over the last five years) in a high barrier to entry business. In their most recent quarter, they surprised most investors with the strength of their civil business, which continues to experience strong secular tailwinds from higher commercial and business air travel demand. We expect this to continue. CAE has 160 training locations in 35 different countries, which creates a massive competitive advantage. We believe the current multiple of 12-times EBITDA could be higher based on fundamentals, organic growth potential and their free cash flow profile. CAE is an attractive investment for the long term that checks a lot of boxes in the current environment.

PAST PICKS: MAY 7, 2019

EMERA (EMA:CT)

• Then: $50.60
• Now: $53.71
• Return: 6%
• Total return: 8%

OPEN TEXT (OTEX:CT)

• Then: $52.99
• Now: $57.52
• Return: 9%
• Total return: 10%

CCL INDUSTRIES (CCL/B:CT)

• Then: $55.56
• Now: $55.31
• Return: -0.5%
• Total return: 0.1%

Total return average: 6%

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