Jason Mann, co-founder and chief investment officer, EHP Funds

FOCUS: North American equities 


Markets continue to trade in a wide, volatile range as investors try to determine how far central banks will go in their quest to stamp out inflation. We think the U.S. Federal Reserve is done in that all the rate hikes it will do are already discounted by the bond market. The Fed is talking tough, but we think it knows its actions are having a real effect.

Inflation peaked in March of last year, but it can take a long time for that to show up in the headline number. Some components like rent, use stale data from 10 months ago even in the most recent print. When measured on a faster timeline, annualizing the most recent three months, inflation is already down to 3.1 per cent and some items like durable goods are actually in deflation.

We think we can actually see a soft landing and that investors are too pessimistic. With 90 per cent of managers expecting a recession, how likely is that to be the outcome? We think we avoid a full-blown earnings and employment recession.

Retail investors got scared in September, the dip buyers were burned and equity funds have had outflows ever since. Market darlings like Tesla have finally cracked, suggesting we are closer to the end of this bear market than anticipated.

Bonds look great here, investors should consider high-yield debt before stocks, and for those looking at equities, stick to higher quality, cash-flowing companies with less debt on the balance sheet. Equity dollars will be scarce e in the near term, be picky!

We’re overweight in high-quality cyclicals for energy, financials and materials. We’re avoiding, or are short in, still expensive growth stocks and bond-proxy sectors like utilities and REITs. Avoid the trap of buying unprofitable tech, the charts will resemble those of cannabis stocks with lower lows and more pain.

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Jason Mann's Top Picks

Jason Mann, co-founder and chief investment officer at EHP Funds, discusses his top picks: Mosaic, Aimia, and Constellation Software.

Mosaic (MOS NYSE)

  • We’re looking for cheap, high-quality cyclical businesses that can benefit from an economic recovery.  Mosaic fits this bill. Mosaic produces and distributes fertilizer. (potash, phosphates) worldwide. It is about half of the size of Canadian producer Nutrien.
  • The stock is flat over the last year (which is actually quite a good result) with an uncertain potash outlook and price cuts causing operations and earnings to underperform longer term.
  • That said, with limited Russian supply, China ramping back up and inventories having been drawn down, pricing should improve looking forward.
  • Mosaic is cheap. Even in a tough environment has delivered a 36 per cent return on equity and trades at only 3.2x EV/EBITDA and 7.5x FCF. Balance sheet is in great shape, and pays a small yield as well but with a low payout ratio.
  • Free cash flow yield looks to be about 25 per cent using spot prices, and the stocks’ relative price momentum has it as a buy for us at these levels.

Aimia (AIM TSX)

  • This one is a bit of a departure from traditional earnings metrics stories we usually look at and is more of a special situation.
  • Aimia formerly had the contract to run Aeroplan, but then Air Canada cancelled that and ultimately bought the business back from Aimia. Since then, it is essentially a holding company, run by managers with a track record of value investing. It is essentially a public asset manager/hedge fund.
  • It recently sold its interest in PLM to Aeromexico for $541 million and this is where the story gets interesting. Today, the have interests in a few other companies worth around three or four dollars per share. It has cash of more than six dollars per share from its asset sales. Net of preferred shares, this gives it an estimated “sum-of-the-parts” of about seven dollars per share. The stock currently trades at $3.90, at just over half of its “fair” value, which we think makes it too cheap to ignore.
  • Sum-of-the-parts only works if management can do something to close the discount. It has $785 million of tax losses that can be utilized, and are in the enviable position of having a ton of cash to put to work at now very compelling valuations given the market sell-off. Since taking over the business, current management has been very active in crystallizing value. If it can’t find cash-flowing businesses to buy, it will continue to buy back stock, effectively returning cash to shareholders. In the past, it has done regular buybacks as well as substantial issuer bids.
  • Ultimately discounts like this don’t persist forever, and while we think you need to be patient, we also think it is aligned with shareholders as large personal holders of the stock, and that it will work to close the discount to fair value.

Constellation Software (CSU TSX)

  • We talked about expensive, unprofitable tech stocks as ones to avoid. Constellation is the opposite of that in that it continues to generate a remarkable return on equity even in a tough market for tech.
  • It is a consolidator, consistently buying, optimizing and managing solid software verticals.
  • It is an incredible allocator of capital and has consistently earned a return on equity above 30 per cent a year for more than a decade.
  • It bought 32 companies in just the fourth quarter of last year, and 132 for the full year, with an average acquisition size in the $10 million range.
  • It’s not conventionally cheap when looked at on an EPS basis (47x), but is cheap when looked at in the context of 60 per cent return on equity which is what it reported last year. Its structure is such that everyone is aligned with a “return on invested capital” approach.
  • Importantly, with the valuations of software coming down so much, it should have a wealth of targets to look at now at much more reasonable prices.
  • Bottom line, it is a (so far) unrelenting cash machine, and we’re buying it as one of the best positioned to continue to roll up a now much cheaper software sector.




PAST PICKS: March 31, 2022

Jason Mann's Past Picks

Jason Mann, co-founder and chief investment officer at EHP Funds, discusses his past picks: Archer-Daniels-Midland, Capstone Copper, and Enerplus.

Archer-Daniels-Midland (ADM NYSE)

  • Then: $90.26
  • Now: $87.90
  • Return: -3%
  • Total Return: -1%

Capstone Copper (CS TSX)

  • Then: $7.07
  • Now: $6.01
  • Return: -15%
  • Total Return: -15%

Enerplus (ERF TSX)

  • Then: $15.84
  • Now: $23.01
  • Return: 45%
  • Total Return: 47%

Total Return Average: 10%