May 2, 2018

Peter Hodson's Top Picks: May 2, 2018

BNN Bloomberg

Peter Hodson , BNN Bloomberg

Peter Hodson, founder and head of research at 5i Research
Focus: Canadian small and mid-cap stocks

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MARKET OUTLOOK

Investors are a bit nervous these days, having seen more volatility in the first quarter of 2018 than they did in all of 2017. The U.S. market in fact has already had two official corrections this year. Caterpillar's "high-water mark" comments gave investors pause: If earnings growth is so great this year, what are comparisons going to be like next year? Can it get any better than this? Well, it can, but it raises a good point. Even though investors are nervous, expectations are still nonetheless very high. So far, corporate earnings have been solid. Can you believe Amazon's web services division rose 49 per cent last quarter considering how big it is already? 80 per cent of S&P companies reporting so far have beaten earnings estimates. One thing we view very positively is that companies are starting to spend money again. Capital budgets are increasing and this is a good sign of confidence. For the past decade (post financial crisis) companies have been "worried" and now they're ready to spend again. This should help industrial and tech companies and we've already seen its impact in top line revenue growth at most companies. The market still looks OK to us.

TOP PICKS

GREAT CANADIAN GAMING (GC.TO)

The company continues to buy back stock. Share count has declined by 22 million in the past decade, even while revenue nearly tripled. New expansion into Ontario with a partnership with Brookfield sets up solid future growth opportunities. Earnings per share are up more than five-fold since 2011.

THE STARS GROUP (TSGI.TO)

Another gambling stock. Now $40, we were the first company to cover it (at $2.30 per share). There are very few truly global industry players that are based in Canada. The Stars Group's recent deal to buy Sky Betting & Gaming takes it to the next level. It diversifies its online business and is highly accretive. The stock has done well, but there's more upside in this one.

CELESTICA (CLS.TO)

Just too cheap to ignore at 10-times earnings. Also a prolific buyer of its own stock, the share count has declined by 88 million (30 per cent) in 10 years. Recent earnings were ahead of estimates, and the acquisition of Atrenne looks solid. It's a late-cycle play and business may start to pick up as the economy heats up.