Dec 15, 2017

Peter Hodson's Top Picks: December 15, 2017

BNN Bloomberg

Peter Hodson , BNN

Peter Hodson, founder and head of research of 5i Research
FOCUS: Canadian small and mid-cap stocks
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MARKET OUTLOOK

Well, another year is drawing to a close. If you invested in the right sectors, you did very well. If you caught a few bubbles — and there were many — you might have had lifetime investment returns within a single calendar year. Is bitcoin a bubble? Probably. But bubbles can last a long time. However, when we see multiple companies 'change paths' to turn themselves into whatever is hot, we automatically get cautious. Mining companies (mining for metals) have suddenly morphed into cryptocurrency mining companies, and investors are falling all over themselves to support the new ventures. HIVE Blockchain (HIVE on TSX-V) announced a $100 million financing this week; power companies are converting to bitcoin mining on the belief that their cheap power gives them an advantage. Where have we seen this before? Oh yeah, in the dot-com days. It did not end well (for most). Companies with no revenue and no history should not usually get $1 billion valuations.

The good news is we do not think any of this matters to the 'real' market. The economy is strong. Investors are taking interest rate hikes in stride. Global growth is picking up. Earnings growth is accelerating, and tax cuts will benefit many companies. Everyone is talking about a correction and we will no doubt have one. However, we would expect it to be just that — a correction within a continued strong market. Confidence is returning to companies, deals are being done daily (our Growth Portfolio had a takeover at a 102 per cent premium this week in Pure Technologies) and there continues to be an asset shift from bonds to equities. We are not in recessionary conditions by a long shot, and there is no reason markets cannot do well again in 2018. We would target technology, industrials and resources. With global synchronized growth occurring for the first time in decades, we would expect resources, and maybe even oil, to do better than they have been. Let others worry about timing the market — stay diversified with quality long-term companies and enjoy the coming year.

TOP PICKS

KINAXIS (KXS.TO)
The stock was beaten up badly over the loss of a customer, but the underlying business remains very strong. The stock recovered nicely after the recent quarter. It is expanding globally, is very well managed, has $151 million in net cash and strong earnings growth is expected. It is not very well known but could be a big global software provided one day.

ECN CAPITAL (ECN.TO)
The company is run by entrepreneur Steven Hudson, and an update this week showed lots of growth potential. The stock is very cheap versus book and asset value. Low interest rates and strong economic growth are a good formula for companies lending money. We would expect good earnings growth and dividend increases over the next several years.

SHOPIFY (SHOP.TO)
Not cheap by any measure, but we believe in growth. We think the short attack was focused on the wrong aspects of the company. It is not a multi-level marketing company. It should be profitable in 2018 and continues to have close to $1 billion in cash. Some view it as 'controversial' after the short attack, but it is simply a company facilitating online merchants, and one whose market share is becoming dominant. It has never missed a revenue/earnings estimate, and online shopping is going to continue to grow massively. It is the leader in a fast growing space, which usually means a solid stock. We would expect a very strong fourth quarter based on online holiday sales trends.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
KXS	N	N	N
ECN	N	N	N
SHOP	N	N	N

PAST PICKS: MARCH 27, 2017

PREMIUM BRANDS HOLDINGS (PBH.TO)

Then: $82.41
Now: $105.78
Return: 28.35%
Total return: 30.15%

METHANEX (MX.TO)

Then: $59.92
Now: $74.17
Return: 23.78%
Total return: 26.07%

ZCL COMPOSITES (ZCL.TO)

Then: $13.54
Now: $10.89
Return: -19.57%
Total return: -17.34%

TOTAL RETURN AVERAGE: 12.96%

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
PBH	N	N	N
MX	N	N	N
ZCL	N	N	N

FUND PROFILE
5i Research Balanced Equity Portfolio
Performance as of: November 30, 2017

1 Month: 2.87% fund, 0.65% index
1 Year: 13.62% fund, 9.60% index
3 Year: 12.55% fund, 6.38% index

*Index: TSX Composite Total Return Index
**Includes reinvested dividends. No management fees apply. Using a $750,000 portfolio following our model, our Membership would amount to the equivalent MER of 0.02 per cent.

TOP HOLDINGS AND WEIGHTINGS