Peter Imhof, vice-president and portfolio manager at AGF Investments
Focus: North American small caps

MARKET OUTLOOK

I’m presently optimistic regarding the Canadian market. It has been strong after an extremely difficult 2018, with the market’s year-to-date performance having its best start since 1980. We have retraced all the losses from December. Last year, small-cap stocks in particular were hit the hardest.

Historically, if you’ve looked at the Canadian market after more than a 10 per cent move down in any given year, it’s usually followed by a year of outsized returns. The average return following a 10 per cent decline is a little over 12 per cent. The returns are even greater after a year of severe multiple contractions, which occurred in 2018. The severe underperformance of Canada over the U.S. market for the past 10 years will eventually reverse as investors move into resources and lower valuation companies. The outperformance has been dramatic when you consider the S&P 500 has returned 11.3 per cent compound annual growth rate (CAGR) over the past eight years compared to the TSX at 3.8 per cent and the Small Cap Index at minus 1.8 per cent. I believe much of the pessimism is already built into the Canadian market and that we should start to outperform over the next several years.

TOP PICKS

WPT INDUSTRIAL REIT (WIR_u.TO)

WPT is an industrial REIT that is a great play on the growth of online shopping. A few of its largest tenants are Zulily, Amazon and General Mills. The stock presently yields 5.8 per cent and trades at a discount to both the Canadian and U.S. peers on a multiple of funds from operations. The occupancy rate is at 98 per cent and the same property growth posted in Q3 was 2.9 per cent. The company also recently renewed and expanded their agreement with Amazon, which bodes well for future visibility.

TAMARACK VALLEY (TVE.TO)
Most recent purchase on Jan. 18 at $2.25.

Tamarack Valley is an oil and gas producer in Alberta and Saskatchewan. The company continues to deliver on production numbers and is doing so while keeping costs in check. The stock has recently been under severe pressure along with most of the energy sector. As recently as October the stock was trading at over $5 and is down over 55 per cent in the past few months. Operationally the company has been hitting all targets and trades at 3.6 times 2019 enterprise value to debt-adjusted cash flow (EV/DACF), which is one of the lowest multiples in the sector. Tamarack has some of the highest netbacks in the industry and good flexibility depending on where prices trend over the next year.

KRAKEN ROBOTICS (PNG.V)
Recently purchased it at 40 cents on a deal.

Kraken is a leader in Maritime Robotics. Kraken’s core product is its Synthetic Aperture Sonar technology. It produces 15 times better resolution and covers 10 times the area than a traditional side-scan sonar (SSS). The company is still at its infancy, but has been showing rapid growth in revenues. Revenues were $1.8 million in 2015, $2.2 million in 2016, $3.5 million in 2017. 2018 estimates are for $7 million, while in 2019 they’re between $13 and $15 million in revenues. The company has numerous opportunities for large contract wins that we should get clarity on over the next year. If the company wins any of these, it would dwarf current revenues.

PAST PICKS: DEC. 21, 2017

YANGARRA RESOURCES (YGR.TO)

• Then: $4.67
• Now: $2.63
• Return: -44%
• Total return: -44%

PHOTON CONTROL (PHO.V)

• Then: $1.83
• Now: $1.17
• Return: -36%
• Total return: -36%

RELIQ HEALTH TECHNOLOGIES (RHT.V)

• Then: $1.36
• Now: $0.33
• Return: -76%
• Total return: -76%

Total return average: -52%

WEBSITE: agf.com