Ryan Modesto, managing partner at 5i Research

Focus: Small- and mid-cap Canadian equities
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MARKET OUTLOOK
Looking at historical valuations, it is hard to find a metric that clearly shows developed markets as being cheap or showing a great deal of value, but we think this is an oversimplification of the valuation question. We think the real question is: by how much are markets overvalued? This is tougher to answer than simply stating “markets are expensive.” If markets are only 10 per cent overvalued, investors may be more than happy to take on this risk given the alternatives over the long term, but at 25 per cent, or 35 per cent, it may be a bit of a different story. We believe markets are more in the former category than the latter. Markets have indeed been strong, but it is hard to call them frothy and it seems almost every market participant views valuations as being expensive. As long as everyone remains so pessimistic toward the valuation question, we would tend to remain comfortable with markets in the context of low rates as well as a strengthening economy and earnings out of the United States and Canada. We expand on this topic here.

TOP PICKS

CRIUS ENERGY TRUST (KWH_u.TO)
Sells electricity and natural gas across the United States. The company has been a dividend grower while offering a yield of 7.8 per cent. Revenues are rising and debt is very low while the payout ratio is cited as being in the 60-per-cent range. Their strategy is more of a white-label approach whereby they leverage the brand and leads from their partners opposed to sourcing them on their own.

ALTUS GROUP (AIF.TO)
Altus offers advisory and data services to the real estate industry. It is building a software platform that aims to be an end-to-end solution for their market, which will add recurring revenues at what should be higher margins. The company also has a 14-per-cent stake in a company called Real Matters, which is expected to file an IPO sooner rather than later.

KNIGHT THERAPEUTICS (GUD.TO)
One of our highest-rated stocks at 5i Research. The company licenses and brings pharmaceutical drugs to market. Nearly half of the market cap is in cash. Due to this, it looks expensive, but if it were to put all of the cash to work today and generate a fair return on those funds, the valuation would suddenly look much more reasonable. GUD is also one of the few investable options, in our view, within the Canadian health-care sector.
 

PAST PICKS: MARCH 3, 2016

SAVARIA (SIS.TO)

• Then: $5.85
• Now: $14.41
• Return: +146.32%
• TR: +152.01%

ANDREW PELLER (ADWa.TO)

• Then: $8.33
• Now: $11.07
• Return: +32.84%
• TR: +35.43%

CONCORDIA INTERNATIONAL (CXR.TO)

• Then: $39.45
• Now: $1.85
• Return: -95.29%
• TR: -95.26%

TOTAL RETURN AVERAGE: +30.72%