Peter Imhof's Top Picks: June 13, 2018

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

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MARKET OUTLOOK

Presently, I’m somewhat cautious in the short term for small caps within Canada. We’re heading into the summer season, where liquidity dries up, and Canadian small caps typically struggle in that environment. Investors should focus their attention on those companies that have recently reported strong earnings over the past couple of quarters. The market is very shortsighted these days and any company that misses on the top or bottom line is being punished. In our funds, we’ve moved up the market cap spectrum over the past few months to those companies that are more liquid and have better visibility. We may get an opportunity to purchase some of the smaller companies over the summer at discounted values. I’m still bullish on the small-cap sector over the medium to longer term, as a reversion to the mean will have to occur. Small caps in Canada have dramatically underperformed their large-cap counterparts over the past seven years. Recently, we’ve seen that underperformance narrow over the past few quarters. Stronger resource prices in both oil and copper should help the earnings outlook for smaller-cap names. The longer the oil price shows strength, the more investors will feel comfortable moving down market cap within the sector. We’ve started to see this with many of the small-cap oil names dramatically outperforming the large-cap names on a year-to-date basis.

TOP PICKS

AG GROWTH INTERNATIONAL (AFN.TO)
Purchased more over the past weeks at $58.

A leading manufacturer of grain and fertilizer handling, storage and conditioning equipment, the company recently reported a blowout quarter with sales up 38 per cent year-over-year. Canadian sales were up 12 per cent in the quarter despite the late start to typical spring weather. U.S. sales were up 50 per cent in the quarter and international sales were up 72 per cent. All three regions saw their backlogs increase dramatically, which bodes well for future quarters. The stock trades at a little over 10-times 2018 earnings before interest taxes depreciation and amortization (EBITDA) despite very strong growth in recent quarters and good visibility. AG Growth presently pays  a $2.40 dividend and yields just over 4 per cent. I believe the company has lots of running room internationally and we should see some very good growth both in the next few quarters as well as the next few years.

AECON GROUP (ARE.TO)
Recently purchased at between $14 and $15.

Aecon is one of Canada’s largest publicly traded construction firms. Aecon was recently the subject of a takeover offer from China Communications Construction Company. The Canadian government stepped in and decided to not let the offer go through. Subsequent to the offer being blocked, the stock took a 25 per cent hit. During the time period that Aecon was the target, all other stocks within that sector had material multiple expansions. I believe this has given investors a very good entry point. The stock trades at 5.4 enterprise value to EBITDA on 2018 numbers (approximately two multiple points less than competitors). During the time of the takeover offer Aecon was able to sign three large contracts which will fill out their backlog.  Presently, Aecon’s backlog stands at an all -time high and I’d suspect that they will continue to add to it.

YANGARRA RESOURCES (YGR.TO)
Largest holder. We continue to have a large weight.

This oil and gas company has been one of the best performers over the past three years. Production has rapidly increased by over 90 per cent in 2017 and projections are for 50 per cent plus growth for 2018. Yangarra has one of the highest margins of any oil producers, as they manage their costs better than most in the oil patch. We should see a material bump in production in the second half of the year. The stock has pulled back recently with the downturn in the oil price. I believe this level is a good entry point for those who thought the stock had run away from them.

PAST PICKS: SEPT. 28, 2017

TAMARACK VALLEY ENERGY (TVE.TO)

• Then: $2.85
• Now: $4.26
• Return: 49%
• Total return: 49%

SPIN MASTER (TOY.TO)

• Then: $46.57
• Now: $53.07
• Return: 14%
• Total return: 14%

WPT INDUSTRIAL REIT (WIR_u.TO)

• Then: $13.43
• Now: $13.92
• Return: 4%
• Total return: 8%

Total return average: 24%

AGF Canadian Growth Equity Class
Performance as of: April 30, 2018

1 Month: 3.9% fund, 1.8% index

6 month: 2.2% fund, -1.2% index

3 Year: 2.3% fund, 3.8% index

* Index: S&P/TSX Composite
* Returns include reinvestment of all dividends and/or distributions

TOP 5 HOLDINGS AND WEIGHTINGS

1. Royal Bank: 5.4%
2. Parex Resources: 4.9%
3. Bank of Nova Scotia: 4.7%
4. Yangarra Resources: 3.5%
5. Real Matters: 3.4%