Nov 15, 2018

Peter Hodson's Top Picks: Nov. 15, 2018

BNN Bloomberg

Peter Hodson , BNN Bloomberg

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

MARKET OUTLOOK

It has been a very tough few months for mid-cap investors, who seem worried, stressed and despondent. The venom in which good and great stocks are being sold is surprising. Investors are acting as if it’s 2008 all over again, but it’s not. All we’re seeing is worry; no one seems to be looking at the fact that we have full employment, 8 per cent expected earnings growth, low inflation, low valuations and low interest rates.

Companies such as CCL Industries, NFI Group and Kinaxis are being crucified for missing earnings even though they have created lots of long-term value in the past five years. Energy-sector investors are the most despondent we’ve ever seen even though the oil price is still twice its financial crisis low. We can name TSX stocks down 50, 60, 80 per cent and more. Tax-loss selling will almost ensure more stocks go down than up over the next four weeks. So what's an investor to do? Doing nothing is not a bad idea.

This period of market “hate” will pass. Sure, we’re maybe setting up a recession in the economy, but even so it will be short (as they usually are) and then interest rates will peak. It might be time to reconsider those utility stocks if you’re indeed worried. The market malaise will pass. Last time we checked, full employment was good for the economy. Investors worried about inflation might remind themselves that a bit of inflation isn’t that bad, anyway. Start looking for the phrase “soft landing” next year. Some sectors are slowing (such as semiconductors), but growth is not dead. Take a cue from corporate activity: All we’re seeing is dividend increases and takeovers. Corporations are far more confident than investors right now.

TOP PICKS

BOYD INCOME FUND (BYD_u.TO)

Boyd operates collision repair shops. We’re looking for consistency in this market, as nothing else seems to be working well. The company just raised its distribution and sales rose 17 per cent. It’s simply a well-managed company that delivers the goods time and time again. Earnings growth looks good for the next two years and we expect more acquisitions.

GREAT CANADIAN GAMING (GC.TO)

The stock was hit earlier this year on concerns about the GTA bundle acquisitions. But recent results show that it is already four years ahead of plan in Ontario. Gambling is a nice play to hide out in if the economy does falter. A well-run company now in partnership with Brookfield, its Ontario expansion is going exceptionally well. It’s bought back a lot of stock and trades at 19 times earnings. Management knows what it’s doing.

CCL INDUSTRIES (CCLb.TO)

A packaging company focused on consumer products, it has grown earnings per share every year in the past decade. The stock is up 13-fold in eight years, yet investors crucified it recently for one quarterly earnings miss. Its product sales aren’t likely to decline in a bad economy and solid earnings growth is still expected in the next two years. Its big earnings drop simply doesn’t make that much sense to us.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
BYD_u	N	N	Y
GC	N	N	Y
CCLb	N	N	Y

PAST PICKS: OCT. 19, 2017

CELESTICA (CLS.TO)

Celestica is rapidly spending its cash on acquisitions, setting up future growth. It’s only trading at nine times earnings. The company has been disappointing, but it’s too cheap right now.

Then: $15.15
Now: $13.08
Return: -14%
Total return: -14%

ABSOLUTE SOFTWARE (ABT.TO)

Absolute Software is acting better these days, up 22 per cent for the year. Its consistent cash flow is winning it new friends in a tough market.

Then: $8.45
Now: $8.36
Return: -1%
Total return: 4%

PHOTON CONTROL (PHO.V)

Photon Control is sitting on a lot of cash, has no debt and is still profitable. But the semiconductor industry is undergoing a slowdown and it’s going to be weak until spending resumes. It will be here for the next cycle.

Then: $1.71
Now: $1.07
Return: -37%
Total return: -37%

Total return average: -16%