Jason Mann, co-founder and chief investment officer at EHP Funds
Focus: North American equities

MARKET OUTLOOK

When we were last on the show in mid-February, we noted that our tactical risk indicators had gone “risk on” after the Fed blinked and turned dovish. That remains the case, with all equity markets globally in an uptrend and the riskier parts of the debt market showing strength.

The rally, however, has had a defensive tone to it, with sectors like consumer staples, utilities and REITs all leading the market higher. High-priced growth stocks (FAANG in the U.S.) have also been relatively strong, which appears inconsistent with the defensive rally.

The big question now is whether global economic growth, which has been decelerating for a year now, has found a bottom and can turn back up. If so, we think the rally rotates to a more cyclical one, with sectors like industrials, materials and even energy picking up the baton. They all have the benefit of much more reasonable valuations than defensive and growth sectors, but they absolutely rely on the market believing that rates are going higher, not lower and that broad global growth returns.

We don’t see a near-term recession, but we also admit that the market has run up ahead of actual improvement in the economic numbers. We need to see a turning point soon on growth. This will likely takes a trade deal of some sort and a relaxing of tariffs to help that happen.

TOP PICKS

Jason Mann's Top Picks

Jason Mann of EHP Funds shares his top picks: Enerplus, Gibson Energy and Brookfield Business Partners.

ENERPLUS (ERF.TO)

Enerplus is an energy producer with assets in both Canada and the U.S. It scores in the top 1 per cent of all stocks for us on valuation. It has a strong balance sheet, with net debt of about 10 per cent enterprise value. It has a smallish yield of 1 per cent, but has ample room to increase it.

Price momentum has been tougher, which is true for the sector overall, but we think an inflection point is coming. Energy is starting to outperform on a relative basis and momentum scores are turning up. There are a ton of money managers who have given up on the sector, and will chase to catch any real rally.

Enerplus has one of the lowest sustaining break-evens and one of the best cash flow yields among its peers. They have less torque to a recovery in energy prices, so the stock will lag a major rebound in energy. The difference is you won’t go broke holding Enerplus while you wait for a recovery to materialize.

GIBSON ENERGY (GEI.TO)

Gibson is a midstream energy company, operating facilities and infrastructure. They’ve been completing some non-core asset sales and right-sizing their balance sheet (now back to investment-grade), with the ability to deploy capital to growth. They think they can do $200 to $300 million a year in growth projects, which should increase valuations further.

Valuation is reasonable for infrastructure company at 12 per cent return on equity, 10 times EBITDA and a 6 per cent yield that’s fully covered. Price momentum is strong as well. A key driver will be management’s ability to secure new projects to drive the growth, but it’s worth investing in on the basis they will.

BROOKFIELD BUSINESS PARTNERS (BBU_u.TO)

Think of Brookfield Business Partners as a private equity firm, with a set of managers and operators that invest in and improve a portfolio of businesses. They look to generate a return of 15 per cent on the portfolio and have bought companies in energy, infrastructure, power and healthcare. They’re cheap on the operating metrics that flow through to you as an investor. Not unlike a private equity model, they do use a fair bit of debt, so you’re counting on them using that prudently to enhance returns.

The company likes to recycle capital, meaning that they’re happy to sell businesses once they hit valuation targets and reinvest in the next turnaround or operational improvement story. Price momentum has been strong and it’s a relatively stable stock. It’s quite a unique way to get access to some of the best investment/management team in the business at a reasonable price.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
ERF N N Y
GEI N N Y
BBU-U N N Y

 

PAST PICKS: APRIL 5, 2018

Jason Mann's Past Picks

Jason Mann of EHP Funds reviews his past picks: Transcontinental, Methanex and ARC Resources.

TRANSCONTINENTAL (TCLa.TO)

  • Then: $26.31
  • Now: $14.99
  • Return: -43%
  • Total return: -41%

METHANEX (MX.TO)

  • Then: $81.22
  • Now: $64.72
  • Return: -20%
  • Total return: -19%

ARC RESOURCES (ARX.TO)

  • Then: $14.53
  • Now: $7.90
  • Return: -46%
  • Total return: -42%

Total return average: -34%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
TCLa N N N
MX N N Y
ARX N N N

 

FUND PROFILE

EHP Select Fund
Performance as of: April 30, 2019

  • 1 month: 3.3% fund, 2.9% index
  • 1 year: 3.5% fund, 9.1% index
  • 3 years: 7.2% fund, 9.1% index

INDEX: TSX Total Return.
Returns are based on reinvested dividends, net of fees and annualized.

TOP 5 HOLDINGS

  1. Quebecor: 5.8%
  2. Aritzia: 5.6%
  3. Badget Daylighting: 5.5%
  4. Hudbay Minerals: 5.3%
  5. CGI Inc: 5.2%

WEBSITE: ehpfunds.com