Peter Hodson, CEO and head of research, 5I Research

FOCUS: Canadian Small and Mid-Cap Stocks

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MARKET OUTLOOK:

Investors are continuing to worry about this, that or the other thing, and this makes us more confident. Short selling has risen and this makes us more comfortable. Not many are expecting much, yet first-quarter earnings so far have been 'not bad'. We have counted dozens of dividend increases, there continues to be takeover and privatization moves, and valuations are reasonable.

We have seen a recovery in metals and energy, but we are not quite convinced of its sustainability. Much of the rally is fund managers trying to protect their competitive positioning: if metals are running, fund managers have to buy. We would continue to stay cautious, sector-wise. You do not need to follow the TSX's 'all-in' strategy of financials and resources. We like to see every sector represented in a customer's portfolio. This reduces volatility and risk, and has worked very well in our three Model Portfolios since we started 5i Research in late 2011.

We continue to get questions on 'sell in May' and it is just not worth it. We get questions on the sustainability of the Canadian dollar mini-rally: hard to call, but economically we are just not in the same league as the U.S. right now. The U.S. is still going to raise interest rates, so we would not bet too much on the Canadian dollar right now, either.

We think it will remain a stock pickers' market. Stay diversified, don't buy companies with too much debt, and you will likely still have a decent investment year.

Top Picks:

Kinaxis Inc. (KXS.TO)

Another quarter, another blow away by the company yesterday. For a new-ish public company (IPO June 2014) it can be a role model for other companies on how to make a splash in equity markets. Results in the first quarter were well above expectations, with revenue up 37 percent, gross profit up 36 percent, EBITDA up 44 percent and earnings per share up 30 percent. KXS has no debt and $108 million cash as well. A software/cloud company providing planning and response solutions, its products continue to sell worldwide. It has a good partnership with Deloitte to sell supply chain management solutions, and its market cap has risen beyond $1 billion, the point at which more investors take interest. It is not cheap by any means, but its growth potential remains very high, and we expect continued good momentum.

Alimentation Couche-Tard (ATDb.TO)

A much more well-known company, of course, we like it right now on valuation. Confusion and reaction over its recent comments on its dual-class share structure have taken the stock down $10 per share this year, but there are of course no fundamental changes. Shareholders plan to vote against its share structure, and the company has indicated if this occurs it may sell the company. But it still has the same management, and we see these comments from the company as simply a 'poker game' with shareholders. So what if the company is sold? Directors won't sell without a premium. The only thing that has changed is the price. The company continues to grow, make good acquisitions, expand market share and execute well. Management needs to stop being such a bunch of babies and just get back to work. At 20x earnings, it looks good now and we think it is time to take advantage of the situation.

Savaria Corp. (SIS.TO)

Every day in North America 10,000 people turn 65. Savaria provides mobility solutions, including vertical lifts, stair lifts and vehicle mobile assist products. It recently acquired the automotive division of Shoppers Home Health. It pays a nice dividend, has a great balance sheet, and high insider ownership. In the first quarter sales rose 30 percent, margins rose and earnings per share rose 40 percent. A relatively unknown company it continues to execute well and we like the trend, market share and demographics.

Disclosure Personal Family Portfolio/Fund
KXS   N N  Y 
 ATD.B  N N  Y 
 SIS   N  N  Y 

 

 

Past Picks: April 15, 2015

Element Financial (EFN.TO)

  • Then: $17.51
  • Now: $14.66
  • Return: -16.28%
  • TR: -16.00%

COM DEV International (CDV.TO) Acquired by Honeywell 2016/02/09

  • Then: $4.85
  • Takeout price: $5.86
  • Return: +20.82%
  • TR: +22.27%

Patient Home Monitoring (PHM.TO)

  • Then: $1.74
  • Now: $0.27
  • Return: -84.48%
  • TR: -84.48%

Total Return Average: -26.07%

 

Disclosure Personal Family Portfolio/Fund
EFN   N  N  Y 
PHM  N N  N 

 

 

 

Fund Profile

5i Research Inc. Model Balanced Equity Portfolio.

(Note we do not manage money; this is a representative portfolio for clients to follow our suggestions.)

Performance as of April 30, 2016

1 month: Fund +2.1%, Index*+3.4%

1 year: Fund +4.0%, Index*-8.4%

3 year: Fund +23.2%, Index*+3.8%

* Index:TSX Composite

* Returns include reinvested dividends; no fees are applicable

TOP HOLDINGS

Alimentation Couche-Tard 5.8%
Stella Jones 5.8%
Magna 5.7%
CCL Industries 5.5%
Savaria Corp 5.5%

 

Twitter: @5iresearchdotca

Website: www.5iresearch.ca

Blog:http://www.5iresearch.ca/blog

Other:www.canadianmoneysaver.ca