Peter Imhof's Top Picks: Oct. 26, 2018

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

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MARKET OUTLOOK

It's difficult to be bullish on Canada presently, considering we're having another lackluster year relative to the U.S. market. Investors have to take the short-term pain in order to benefit over the longer term. The two sectors in Canada that have outperformed this year are the healthcare sector (predominantly marijuana stocks) and the technology sector (which is very small in Canada). It has been quite frustrating for Canadian investors over the past 10 years, as the Canadian market returned 6.3 per cent per annum while the U.S. market returned just over 12 per cent. If you look at shorter time periods, it's even more magnified: over eight years, there's a 6.4 per cent compounded annual growth rate (CAGR) for Canada versus14.8 per cent CAGR for the U.S.; over four years, a 4.9 per cent CAGR for Canada versus 12.6 per cent CAGR for the U.S.  At some point, the Canadian market has to play catch up and revert to the mean. If you look at returns for both markets over 20 years, they're almost equal. During the period from 2001 to 2007, Canada outperformed drastically as the tech sector in the U.S. unraveled and hard assets outperformed. The fact that the Canadian market is very narrow exasperates the returns. When financials and energy stocks do well, the Canadian market tends to outperform.  As we are seeing higher interest rates and oil prices grinding higher, this should bode well for Canada.The market pullback over the past month has given investors a good entry point on many well established companies that have been oversold.

TOP PICKS:

Due to time constraints, Ag Growth Financial wasn't discussed in the Top Picks segment of today's Market Call broadcast.

PAREX RESOURCES (PXT.TO )
Recently purchased more at $19.10.

Parex is a Colombian oil and gas producer. The company has grown from 5,000 barrels of oil equivalent (BOE) production to 45,000 BOE for the third quarter. Parex initiated a strategic review a few months back and the market reacted negatively to it. They continue to impress on the production side as well as the exploration side. The stock is not reliant on  WTI prices and the differentials that Canadian producers have been suffering through. Parex receives Brent pricing and has been the beneficiary of a rising oil price over the past year. 

TREVALI MINING (TV.TO)
Recently purchased more at 53 cents.

Trevali is a zinc producer with assets in New Brunswick as well as producing assets in Peru, Burkina Faso and Namibia. It's one of very few ways to play zinc in a publicly traded vehicle. The stock has been decimated as of late, with all the other base metal companies. Most recently, they came out with guidance for production from New Brunswick that fell short of expectations and the stock took a 20 per cent hit. The stock looks interesting at current levels as it trades at 0.57 per cent net  asset value (NAV) and approximately 2.3 times enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA). Trevali has a strong balance sheet from cash flows as well as from an equity raise at $1.20 for $260 million in 2017. Although we may see continued weakness over the next eight weeks with tax loss selling the risk/reward looks good at current prices.

AG GROWTH FINANCIAL (AFN.TO)
Average purchase price: $58.

AG Growth is a leader in global food infrastructure. The company has recently reported very strong earnings over the past few quarters and has a robust backlog in Canada as well as international markets. Demand for their products continue to increase at a rapid rate.  The market that they play in is highly fragmented and is ripe for consolidation. The stock has recently sold off as the market has weakened and much of the demand had been soaked up from a recent large equity issue. The use of the proceeds will be to bring down debt and for possible acquisitions. The stock trades at a reasonable valuation relative to its earnings growth rate. Presently the stock is yielding a 4.3 per cent dividend yield.

PAST PICKS:  SEP. 28, 2017

TAMARACK VALLEY (TVE.TO)

• Then: $2.85
• Now: $3.69        
• Return: 29%
• Total return: 29%

SPIN MASTER (TOY.TO)

• Then: $46.57
• Now: $45.95
• Return: -1%
• Total return: -1%

WPT INDUSTRIAL (WIR_u.TO)

• Then: $13.40
• Now: $12.80
• Return: -4%
• Total return: 1%

Total return average: 10%

FUND PROFILE

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

• 1 month: -0.3% fund, -1.3% index
• Year-to-date: -0.6% fund, -4.4% index
• 3 year: 6.1% fund, 11.2% index

* Index: S&P/TSX Small Cap.
* Identify if your fund’s returns are based on reinvested dividends.

TOP 5 HOLDINGS AND WEIGHTINGS

1. Royal Bank: 5.7%
2. Bank of Nova Scotia: 4.8%
3. Parex Resources: 3.9%
4. Boyd Group Income Fund : 3.5%
5. CGI Group: 3.5%