Oct 9, 2018

James Telfser's Top Picks: Oct. 9, 2018

BNN Bloomberg

James Telfser , BNN Bloomberg

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

MARKET OUTLOOK

As we look out to the final quarter of the year, we can see a scenario where global allocations, which have been laser-focused on the U.S., revert back to other markets like Canada. Valuations are attractive outside of the U.S., with Canada specifically trading at a three-turn discount on a price-to-earnings basis. We believe that this spread will narrow as investment flows change direction. While we're still a way off from lifting the complete overhand on Canada, we did just knock off two major issues holding back investment: NAFTA and LNG Canada. This means investors globally can have a little more confidence investing here. We believe these recent overhangs have been instrumental in holding back our financials, industrials and materials sectors. Our call for a rebound in these sectors has been a tough one given the continued pressure we're witnessing, but we believe valuation multiples have compressed too far in view of the current backdrop.

In the short term, we're positioned more cautiously now compared to the beginning of the last third quarter, as we see the speed rates have moved higher creating some volatility which will need to be absorbed. Technology stocks are hovering around critical levels, especially the FAANG complex, which is worth monitoring as they've been a major driver for overall market returns both in the U.S. and Canada. On the other hand, with the strength of recent U.S. economic data and positive earnings trendsm we expect this to resolve to the upside especially given the historical strength of markets during mid-term elections in the U.S.

TOP PICKS

DESCARTES SYSTEMS GROUP (DSG.TO)

Descartes has a lot of the characteristics that we've been looking for in the current environment. As a software company with a focus on logistics (e-commerce, supply chain management and tracking) and a mission to consolidate the industry, we believe that Descartes will continue to benefit shareholders through catalysts in the form of M&A and organic growth. Descartes has an impressive management team with a deep focus on building solutions for their customers and an exceptional free cash flow profile, which handily offsets a valuation that's at the higher than most companies we own.

BROOKFIELD ASSET MANAGEMENT (BAMa.TO)

As we look to add some more stability to the portfolio, we believe Brookfield Asset Management is the perfect candidate. As institutional investors and wealth managers across the globe look to add real assets to their portfolios, we believe Brookfield will be a huge beneficiary. They continue to be very successful on the fundraising side (private equity, real estate and infrastructure) and are beginning to harvest gains on portfolios from five or six years ago. This means investors will start to realize the benefits of additional fees in the form of carried interest. Buying Brookfield today gives you excellent exposure to underrepresented assets, potential for multiple expansion and a significant reduction in the float.

PREMIUM BRANDS HOLDINGS (PBH.TO)

Premium Brands has been under pressure since it peaked in April and is currently down 26 per cent from the high. We've been following Premium Brands for several years and have always been impressed with how its management team allocates capital, both for organic opportunities and M&A (10 since the end of 2016), which has resulted in sales more than doubling since the end of 2015. With the weakness in the shares, the valuation is now much more attractive relative to their growth prospects. The shares are currently trading at 11.8 times EV/EBITDA from a high of 15 times, which we attribute to competitor weakness and some operational misses over the last few quarters. With their leverage at a comfortable level, we expect future catalysts in the form of M&A, positive earnings surprises and free cash flow to propel the shares higher.