Peter Imhof's Top Picks: Nov. 25, 2019

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

MARKET OUTLOOK

Presently, I’m somewhat cautious as we’ve had an extremely strong performance in most markets around the world. I do believe we will grind higher going into year-end, but it never hurts to take a little money off the table while close to all-time highs. In Canada, we’ve had a bifurcated market this year, with defensive stocks ( pipelines, utilities, REITs) drastically outperforming the cyclical names on a year-to-date basis. Valuations have never seen such a wide spread between sectors. Recently, we started to see a rotation from what has worked in the first nine months of the year to those other sectors that had been underperforming. The value trade seems to be gaining momentum, which bodes well for Canada.

The Canadian market returns have also been quite varied depending on what market capitalization you invest in. The larger cap names have materially outperformed the smaller cap names on a year-to-date basis. The S&P/TSX is up approximately 18 per cent while the S&P/TSX Small Cap Composite is up about 5 per cent year-to-date and the venture is down 5 per cent. I am encouraged by the recent quarterly earnings of many small-cap names. You need to be diligent in terms of what you are buying, but the market does offer some very good companies in Canada that are accelerating their earnings growth.

TOP PICKS

DUNDEE PRECIOUS METALS (DPM:CT)
Recently added to the name last week at $4.50.

The company is a cash-flow-generating machine and things will only get better over the next few quarters. Dundee is one of the lowest-cost mining companies and trades at a significant discount to its peers on pretty much every metric. It has one of the highest free cash flow yields of any company regardless of what sector. Analysts have them earning 80 cents next year, which implies a 5.6 times price-to-earnings on 2020 earnings. The company also offers some hidden value, with ownership stakes in other companies that are not well understood.

GUARDIAN CAPITAL (GCG/A:CT)
Last purchased in late September at a little over $24.

Guardian is an asset manager that trades cheaply on a sum-of-its-parts valuation. Performance has been strong in particular in a few global mandates, which positions them well for inflows. In the past nine months, they’ve been able to dramatically increase flows into one of their better performing global mandates, which should continue. The entire asset management space trades at historic low valuations and I believe this is a good name to own both because of the momentum in their business and the fact it trades at a valuation close to all of its underlying stock holdings on the balance sheet.

 CHAMPION IRON ORE (CIA:CT) 
Recently added last week at $1.80.

Champion is an iron ore producer in Quebec. It ecently reported a great quarter in terms of operations, with costs coming down dramatically and production ramping up. The company produces high-grade iron ore and receive a premium for their product. The higher-grade iron ore is in demand, as it’s cleaner to produce and benefits many jurisdictions that are trying to control pollution. The stock has recently pulled back and trades very inexpensively on EBITDA. The risk-reward on this name is very enticing at this point.

PAST PICKS: JAN. 23, 2019

WPT INDUSTRIAL REIT (WIR/U:CT)

• Then: $13.23
• Now: $13.87
• Return: 5%
• Total return: 10%

TAMARACK VALLEY (TVE:CT)

• Then: $2.07
• Now: $1.84
• Return: -11%
• Total return: -11%

KRAKEN ROBOTICS (PNG:CV)

• Then: $0.52
• Now: $0.66
• Return: 27%
• Total return: 27%

Total return average: 9%