Aug 3, 2016

Peter Hodson's Top Picks: August 3, 2016

BNN Bloomberg

Peter Hodson , BNN

Peter Hodson, CEO & Head of Research, 5i Research

FOCUS: Canadian Small and Mid-Cap Stocks

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MARKET OUTLOOK:

We preached to investors for years now that panic is never a good investment strategy. The Brexit situation and the big July recovery prove this once again. Immediate post-Brexit, investors panicked, many looked to restructure their entire portfolios, move to cash, or hedge their bets. Yet just a few weeks later, markets hit record highs, corporate earnings look fine, and dividend increases and takeover continue at a rapid pace.

We find the current fear in the market a bit unusual. The two key elements for stocks: interest rates and earnings are fairly positive. It seems to us that investors are just looking for reasons to stay cautious, and this can be costly in the long run. We see a lot of portfolio managers holding big cash positions: first, you shouldn't pay a fee on cash, in our view, and second, this has already cost these managers strong performance this year.

We do worry about the election; this is probably the first U.S. election that we have even paid much attention to. There is a wild card here, and markets might experience higher than normal volatility. But so what? For long term investors, a three to four month bumpy market window is not very significant. For buyers, it is great. We expect it will remain a stock pickers' market. There are plenty of good opportunities around. Don't listen to the doom-sayers, most are trying to sell you something or trying convincing you they are smart enough to earn fees from you.

Top Picks:

Pure Technologies (PUR.TO)

Pure is a technology company with patented technologies for inspection, monitoring and management of critical infrastructure around the world. Companies are finally figuring out that preventing, say, a pipeline rupture, is much better than trying to fix the problem after it has occurred. Insiders own 6 per cent, the balance sheet is strong and earnings look set to double into 2017. The dividend is 2 per cent and has the potential to grow longer term.

Magna (MG.TO)

This is simply a valuation call. The stock recovered from Brexit, yet is still only 7x earnings. Its dividend is 2.7 per cent and the dividend has a good growth history. We simply do not believe the auto sector outlook is as bad as the stock price implies. The balance sheet could support more acquisitions and cash flow is solid.

New Flyer (NFI.TO)

We like the backlog, management, and growth prospects. Its market cap is now big enough to get attention. The dividend was raised nicely in June, and at 15x earnings with good growth prospects we think it still has room to move.