Jun 11, 2018

Michael Decter's Top Picks: June 11, 2018

BNN Bloomberg

Michael Decter , BNN Bloomberg

Michael Decter, president and CEO of LDIC Inc.
Focus: Canadian large caps

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MARKET OUTLOOK

We anticipate continuing volatility in view of trade negotiations and unusual unilateral announcements from the U.S. president. We do expect the market to move higher over the balance of 2018 due to strong U.S. jobs growth. We also expect further interest rate increases that will be gradual. Growth equities are likely to outperform income equities as rates move higher. Canada will lag the U.S. on most economic growth increases, but there’s room for Canadian equities to recover lost ground.

We expect the volatility to continue due to inflammatory statements from the U.S. president and fears of the economic consequences of a serious and prolonged trade war. Quarterly earning remain a source of market confidence and a counter to the noise and uncertainty in the political sphere. China also remains a worry although the Chinese seem able to manage through many of their economic issues.

We really like "consolidations" as a category regardless of sector. Examples of consolidators that we continue to own for the long-term include Akumin (one of our Top Picks) and Boyd Group.

TOP PICKS

CARGOJET (CJT.TO)

Cargojet operates air cargo transportation services. The Company transports freight throughout Canada and also in Bermuda and Poland.

It’s one of the best companies in Canada.
It has about 95 per cent market share of the domestic air cargo market.
Their average contract lasts seven years, with 75 per cent of volume pre-purchased.
It’s exposed to the growing e-commerce business.
It’s increasing volumes during downtime on days and on weekends. Volumes drive material margin as all fixed costs are already covered (big operating leverage).
17 per cent insider ownership.
Consistent dividend increases.
Cargojet trades at a reasonable multiple of 9.5 times earnings before interest taxes depreciation and amortization (EBITDA). It still gets compared to airlines and trucking companies (which are low multiples) despite being a far better business.

ENERPLUS CORP (ERF.TO)

Enerplus is a Canadian oil producer with 82 per cent producing assets in two U.S. plays, the North Dakota Bakken and the Marcellus.
Despite strong stock performance, the valuation remains extremely compelling relative to its U.S. peers.
They’ve one of the most conservative balance sheets at 0.5 times debt-to-cash flow and a large undrawn credit line. Enerplus will likely buy U.S. oil production, but they can take their time.
The company has minimal takeaway capacity issues. They get WTI and NYMEX pricing, that is, world prices.
The nice thing about this investment is that, as energy prices move higher, they can take advantage of better prices and further scale down the remaining Canadian production assets. If prices back off, they will look for opportunities to buy U.S. production.
With the existing asset base, we see Enerplus growing production at more than 10 per cent and cash flow per share at close to 15 per cent over each of the next three years. This is well in excess of the peer group and we expect this to translate into further share price appreciation.

AKUMIN (AKUu.TO)

Akumin is the fastest-growing consolidator of outpatient imaging centers.

The company is the fourth largest operator in North America, with 47 centers in three states.
It has a fully centralized, integrated and scalable platform.
It’s grown rapidly in less than three years.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
CJT	Y	Y	Y
ERF	Y	Y	Y
AKUu	Y	Y	Y

FUND PROFILE

LDIC North American Small Business Fund (DAM600 and DAM 611)

The fund invests in a diversified portfolio of small capitalization companies in North America through debt and equity securities, with an objective to achieve long-term capital appreciation. The manager combines a “top-down” and “bottom-up” approach to the investment process. The “top-down” approach uncovers broad investment themes with the potential for growth. The “bottom-up” analysis utilizes deep quantitative and qualitative due diligence to generate specific investment ideas in high-quality companies with strong or improving fundamentals and with material long-term growth prospects.

1 Month: 1.1% fund, 3.1% index
1 Year: 13.4% fund, 10.5% index
Inception (May 31, 2016): 22.8% fund, 6.4% index

* Index: North American Small Business Fund: 70% S&P TSX Small Cap Index (CAD) & 30% Russell 2000 Index (USD)
* Returns are total returns, including income paid to unit holders.

TOP 5 HOLDINGS AND WEIGHTINGS