Norman Levine, managing director of Portfolio Management Corp
FOCUS: North American large caps
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MARKET OUTLOOK

We remain concerned about valuations in the U.S. being stretched but are heartened that, at least for now, its markets are correcting. While it will definitely cause short-term pain for many investors (especially those who have chased the narrow group of growth stocks that have carried the indices higher), value investors will finally see their portfolios outperform, as investors seek out companies with actual earnings and earnings that are growing along with economic activity.

We will continue to carry an above average amount of cash during this time, but we are assembling a list of high-quality companies we would like to buy as their valuations become more reasonable.

TOP PICKS

BADGER DAYLIGHTING (BAD.TO)
Most recent bulk purchase on May 16, 2011 at $6.33 and continue to buy the stock for new clients.
Badger is in the business of using high-pressure water to move earth for utility and energy companies. It is the largest company, by far, in its field in North America. The company has done an excellent job of growing its business in the U.S. and diversifying it away as much as possible from the energy sector during the most recent downturn. A very poor January led investors to wholesale dump the stock after first quarter results were announced and BAD instantly became a ‘show me’ stock. Its second quarter results were a pleasant surprise and much of the negativity towards the stock has disappeared. Regardless, it trades for less than it did a year ago and far less than its peak in April. We believe Badger has good growth ahead and that the valuation is quite reasonable at its current price. BAD recently increased its dividend and currently yields 1.8 per cent.

CARA OPERATIONS (CARA.TO)
Bought on April 28, 2016 at $32.75 and continue to buy the stock for new clients.
Cara is Canada’s oldest and largest full-service restaurant company, operating some of the most recognized names in the country. Over 88 per cent are franchised and over 60 per cent are in Ontario. We like the continued move by Cara to an asset-light business model. It currently has about 8 per cent of the highly fragmented full-service restaurant industry and clearly has room to grow that share through both organic growth and acquisition in both full-service and quick-service. Cara stock has performed poorly for much of 2017 until recently, as investors have punished it for its relatively large exposure to Alberta and for negative same-store-sales. There are also worries about the coming increases in minimum wage in Ontario and Alberta. We think Cara will help out its franchisees to some extent, and we believe the stock more than reflects those concerns. We feel that negativity towards the stock has been overdone, especially as the company’s sales have begun to rebound, as management told us last week. Cara currently sports a dividend yield of 1.7 per cent.

OPENTEXT (OTEX.TO)
Bought originally at $26.18 and continue to buy the stock for new clients.
OpenText is a consolidator and provider of enterprise software solutions. Their software helps large businesses organize their information – both storing and retrieving. For example, OpenText’s software can assist in organizing customer communication for salespeople. For an industrial company, OpenText’s software can help organize workflow – how work and information move from one person to the next. It is an industry consolidator and grows largely through acquisition. The stock weakness, due to concerns over its ability to properly digest its recent acquisitions, provides investors with a very attractive entry point. The stock currently yields 1.7 per cent.
 

PAST PICKS:  NOVEMBER 8, 2016

METLIFE (MET.N) - **Please note that Brighthouse Financial (BHF.O) was spun out of MET.N in July on a 1 for 11 basis. This must be taken into account for year over year return comparison.

• Then: $42.66
• Now: $52.00
• Total return for MET.N: 25.02%
• Total return with BHF.O: 12.00% in CAD

STANTEC (STN.TO)

• Then: $28.93
• Now: $34.49
• Return: 19.21%
• Total return: 20.48%

ARC RESOURCES (ARX.TO)

• Then: $22.56
• Now: $17.73
• Return: -21.38%
• Total return: -19.29%

TOTAL RETURN AVERAGE: 4.39%
 

TWITTER: @levinepmc
WEBSITE: www.portfoliomanagement.ca