Robert McWhirter, President, Selective Asset Management

FOCUS: Canadian Dividend & Growth Stocks

_______________________________________________________________

MARKET OUTLOOK:

Relative to the current ten year North American government bond yields of approximately 1 per cent, the S&P 500 and the S&P/TSX Composite Index’s trailing earnings yield of 4.0 per cent and 5.2 per cent appear attractive. The S&P 500 and the S&P/TSX Composite Index’s trailing dividend yield of 2.1 per cent and 3.0 per cent also appear relatively attractive. Dividends for the S&P/TSX Composite Index have grown by 3.1 per cent in the past year. We anticipate accelerating U.S. economic growth in the second half of 2016. North American stocks are expected to continue to set new highs between now and the end of 2016. It is important to continue to focus on reasonably priced low volatility stocks with rising free cash flow.

Top Picks:

Heroux-Devtek (HRX.TO), Last purchased at $15.27

$550 million market cap designs, Heroux-Devtek manufactures and repairs aerospace and industrial components for military and commercial customers.  With the completion of the capex required for a new Boeing landing gear contract four-quarter trailing free cash flow yield has improved from -4 per cent a year ago to 3.3 per cent. Analysts are forecasting 27 per cent earnings growth for the March 2018 fiscal year giving a 15.6x P/E and an attractive 0.6 to P/E to growth.

TECSYS (TCS.TO), Last purchased at $9.67

$119 million market cap provides end-to-end supply chain management software for hospitals. TECSYS’s new inventory management modules for in-hospital pharmacies and operating rooms have doubled the revenue potential per hospital. The market opportunity over the next seven years is estimated at $3 billion. TECSYS’s sales pipeline has grown three fold versus last year and we expect bookings and sales to accelerate. Year-over-year sales per share grew 26 per cent while year-over-year free cash flow, earnings and ebitda per share grew over 32 per cent. Earnings growth of 18 per cent and an 18 per cent ROE are forecast for the April 2017 fiscal year end. Earnings growth of 24 per cent is forecast for the April 2018 fiscal year giving a p/e of 19x and an attractive p/e growth (peg) of 0.8.

TIO Networks (TNC.V), Last purchased at $2.35

$205 million market cap and is covered by 7 analysts. Processes about 80 million bill payments per year valued at about US$9 billion. TIO Networks has significant business leverage. The recent 18 per cent rise in year-over-year sales per share lead to increases in free cash flow, earnings and ebitda in excess of 100 per cent and an attractive 4.2 per cent free cash flow yield. Earnings estimates have increased 18 per cent in the past 90 days. As a result, earnings growth of 30 per cent and a return on equity of 17 per cent are forecast for the July 2017 fiscal year. TIO Network’s shares appear attractively priced. The $2.75 target implies 17 per cent upside potential.

Past Picks:  May 15, 2015

CAE Inc. (CAE.TO)

• Then: $15.20
• Now: $16.96
• Return: +11.58%
• TR: +14.34%

Intertain Group (IT.TO)

• Then: $19.03
• Now: $11.15
• Return: -41.41%
• TR: -41.41%

Nobilis Health Corp (NHC.TO)

• Then: $9.15
• Now: $3.34
• Return: -63.50%
• TR: -63.50%

Total Return Average: -30.19%

Fund Profile

Canadian Low Volatility Dividend and Income

Performance as of: June 30, 2016

*TSX Total Return Index   *Returns Net Fees & Dividends

Top holdings

1. Metro (MRU.TO) - 5.1%
2. Toromont Industries (TIH.TO) - 4.8%
3. Maple Leaf Foods (MFI.TO) - 4.4%
4. Ritchie Bros Auctioneers (RBA.TO) - 4.3%
5. Alimentation Couche-Tard (ATDb.TO) - 4.3%

Website: selectiveasset.com