Peter Hodson, CEO and head of research at 5i Research

Focus: Canadian small- and mid-cap stocks
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MARKET OUTLOOK
We think markets are okay, although we would probably welcome a small pause as we would like to see a bit more “worry” to keep enthusiasm in check prior to second quarter earnings reports. Investors continue to see stocks as the only alternative, and until something changes, will likely continue to have this view. We are seeing more takeovers, continued dividend hikes and strong earnings, during an environment of very low interest rates. These are near-ideal conditions for equities. Yes, political storms can change this, as can global events. Some pockets of the market are already nervous: Note Element Financial's big plunge on no news at all last week. But, generally, we have good earnings outlooks from companies and not-unreasonable valuations. Growth stocks continue to be recommended, and we do not think the tech rally is out of juice just yet. We would expect a decent summer, especially for U.S. equities, but Canada's market should finally pick up a bit, we think, even with the energy sector providing headwinds.

TOP PICKS

PHOTON CONTROL (PHO.V)
While a small cap, it is one of the only public ways for Canadian investors to participate in the booming semiconductor industry, as PHO provides etching services to the industry. It has a very strong balance sheet and good earnings growth is expected. The market cap has risen to $150 million, which is a level at which more investors pay attention. With all the recent small-cap tech takeovers, we think it represents a good opportunity.

BOYD GROUP INCOME FUND (BYD_u.TO)
For many years Boyd has executed near-flawlessly on acquisitions, and its most recent deal ups the ante, being a much bigger deal. Based on management's ability, we would expect the $200 million Assured Automotive acquisition to be a big success. The deal more than doubles the company's Canadian presence (most locations are in the U.S.) and provides scale and synergies.

KNIGHT THERAPEUTICS (GUD.TO)
Investors are getting bored with Knight, as it continues to sit on more than $750 million in cash looking for acquisitions. But 5i Research wants to make a point here: Boring does not equal “bad.” Knight has an excellent management team, and is sitting pretty with its cash hoard while the health-care sector drops and opportunities present themselves. It has been a while since we have seen such apathy by investors who are selling because “nothing is happening.” But there is plenty going on behind closed doors, and one day Knight will pull the trigger on an acquisition. Based on management's history, when it finally does a deal it will almost certainly be a “good” acquisition. We can wait here, and when it moves we expect the “bored” sellers will regret their decision.
 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
PHO N N MODEL PORTFOLIO ONLY
BYD_u N N N
GUD N N MODEL PORTFOLIO ONLY


PAST PICKS: AUGUST 3, 2016

PURE TECHNOLOGIES (PUR.TO)

  • Then: $5.67
  • Now: $5.50
  • Return: -2.99%
  • TR: -1.27%

MAGNA INTERNATIONAL (MG.TO)

  • Then: $49.64
  • Now: $61.54
  • Return: +23.97%
  • TR: +27.08%

NEW FLYER INDUSTRIES (NFI.TO)

  • Then: $40.35
  • Now: $56.45
  • Return: +39.90%
  • TR: +42.21%

TOTAL RETURN AVERAGE: +22.67%
 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
PUR N N MODEL PORTFOLIO ONLY
MG N N MODEL PORTFOLIO ONLY
NFI N N MODEL PORTFOLIO ONLY


FUND PROFILE: 5i RESEARCH MODEL BALANCED PORTFOLIO

PERFORMANCE AS OF APRIL 30, 2017:

  • 1 month: Fund* +2.8%, Index** +0.4%
  • 1 year: Fund* +23.5%, Index** +13.2%
  • 3 years: Fund* +18.2%, Index** +15.8%

* Returns are with dividends, net of fees (no fees are charged in the 5i Research model portfolios)
** Index: TSX Composite


TOP HOLDINGS AND WEIGHTINGS

  1. CCL Industries: 6.2%
  2. Kinaxis: 6.1%
  3. Premium Brands: 6%
  4. Constellation Software: 5.2%
  5. Magna International: 5.1%


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WEBSITE: www.5iresearch.ca
BLOG: www.5iresearch.ca/blog