Jason Mann, chief investment officer at EdgeHill Partners
Focus: North American equities

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MARKET OUTLOOK

Global markets remain in a funk after the “volatility bomb” this past winter. The only trend is that there’s no trend. The market seems trapped in a technical range, unable to recapture their highs, but also not cracking to the downside. Sector leadership has been inconsistent as well. It seems like every month there’s a shift in what sectors are working.

One thing that has been consistent is the performance of growth stocks over value stocks, with the FAANG and tech stocks being the poster child for this phenomenon. Playing defence has been tough as well. Ironically, one of the best strategies year-to-date would’ve been buying a basket of the most-shorted stocks; even on days where the market has sold off, we’ve noticed that lower-quality stocks that hedge funds use as shorts have tended to outperform. It’s not unprecedented, but it’s unusual and it reminds of us 1999.

High-priced growth isn’t confined to the tech sector and not all tech stocks are expensive. But overall, the valuations are back to the highs reached in 1999-2000. As a percentage of the index, the tech sector is back to levels of the dot-com era.

We think that the growth investing style, which dominated last year’s returns as well, is at most risk, and that investors should be looking to rotate to higher-quality, lower-valuation stocks found in the materials, industrials and discretionary sectors. For yield, REITs have the best risk/reward in our view.

Net-net, earnings are still good, and overall growth in North American is fine. International markets are under more pressure on that front, and a full-blown trade war will be a problem, but it’s possible a good portion of that risk is already priced in the market.

We believe we remain late-cycle, but perhaps not end-of-cycle just yet.

TOP PICKS

Jason Mann's Top Picks

Jason Mann, chief investment officer at EdgeHill Partners, shares his top picks: Husky Energy, Element Fleet Financial and Aritzia.

HUSKY ENERGY (HSE.TO)

We’re looking to add more energy exposure to the portfolios as we’ve seen a marked improvement in momentum. Although stocks look expensive on current cashflows, that should start improving materially in the next few quarters as higher prices flow in to earnings.

Husky is typically viewed as a pretty boring, low-growth integrated oil and gas company, but boring can be good in a cyclical business. They have a diversified production base across various geographies and types of energy, and a refining business that offers a natural hedge to heavy oil discounts. Its cheap on both an absolute basis and relative to other energy peers: it trades at 6.5 times enterprise value to earnings before interest tax depreciation and amortization (EV/EBITDA), versus its peers at 8 times EV/EBITDA. It's got a reasonable balance sheet and a modest dividend, but a low payout ratio of 10 per cent so it could go higher. Price momentum is good as well, and it's quite a stable stock.

Husky is targeting 8 times production growth through 2021, so it's not a growth story. That's likely why it's as hated as it is by analysts: only five "buys" out of 23 that cover the stock.

ELEMENT FLEET MANAGEMENT (EFN.TO)

This pick is perhaps a bit riskier as it's gone through a very challenging period lately, which is evidenced by the stock price. Element Fleet was actually a short for us for some time, but more recently as it has been repriced lower, and as momentum has begun to turn the corner, it's now a small long position for us. If they can deliver on earnings and the stock continues to become less volatile, it could represent a higher weight in our portfolios in the future.

Element is the number 1 player in corporate vehicle fleet leasing. 85 per cent of revenues are North American and they have a diversified client base, so there's not a lot of concentration risk. Sentiment reached maximum negativity following a failed auction to sell the company and them having to take write-downs on a joint venture. They've changed their CEO as a result. Looking forward, valuation sits at 8.5 times 2018 and 7 times 2019 price-to-earnings (P/E). It trades at 0.7 times book value: well below peers and their own average. It has a good yield at 5 times that is sustainable.

One of the main concerns surrounding the company was customer losses. That appears stable as well, with 11 originations growth in the most recent quarter. It’s a value pick with improving momentum. That tends to be our sweet spot

ARITZIA (ATZ.TO)

Aritzia is a fashion retailer straddling fast fashion and affordable luxury. They focus on prime (large city) markets, and clients tend to skew affluent or aspirational. They have proprietary brands that carry high margins and resonate with their core 15-to-45 demographic. Their 12 proprietary brands account for 90 per cent of sales. Sales per square feet are about 70 per cent higher than peers as a result.

This is a growth story, with a 20 per cent compound annual growth rate since 2007. Valuation isn't the cheapest as a result at 21 times P/E, but Artizia has high return on equities at 23 per cent and a clean balance sheet. It reminds us a bit of Dollarama in the early years: it was never cheap looking backwards, but they consistently delivered on the growth. The stock has good price momentum and is a reasonably stable as well, which are two other characteristics that we like.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
HSE N N Y
EFN Y Y Y
ATZ N N Y

 

PAST PICKS: MARCH 30, 2017

Jason Mann's Past Picks

Jason Mann, chief investment officer at EdgeHill Partners, reviews his past picks: Chorus Aviation, BRP Inc. and Martinrea.

CHORUS AVIATION (CHR.TO)

  • Then: $7.45
  • Now: $7.17
  • Return: -4%
  • Total return: 4%

BRP INC (DOO.TO)

  • Then: $31.85
  • Now: $61.79
  • Return: 94%
  • Total return: 96%

MARTINREA (MRE.TO)

  • Then: $10.14
  • Now: $13.18
  • Return: 30%
  • Total return: 32%

Total return average: 44%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
CHR Y Y Y
DOO N N Y
MRE N N Y

 

FUND PROFILE

EHP Select Fund
Performance as of: June 2018

  • 1 Month: -0.5% fund, 1.7% index
  • 1 Year: 10.1% fund, 10.4% index
  • 3 Year: 8.5% fund, 7.0% index

* Index: S&P TSX Composite.
* Returns include reinvested dividends and are net of all fees.

TOP 5 HOLDINGS AND WEIGHTINGS

  1. Canfor: 6.1%
  2. Parex Resources: 5.9%
  3. Interfor: 5.8%
  4. Badger Daylightning: 5.2%
  5. Martinrea: 5.1%

WEBSITE: www.ehpfunds.com