Ryan Modesto, chief executive officer, 5I Research
Focus: Small and mid-cap Canadian equities

MARKET OUTLOOK

Markets are currently hitting the refresh button. The rate of growth that companies have experienced in the past is beginning to normalize with the help of trade wars also biting into results. This lower growth expectation has led to valuations falling particularly at companies that were past darlings. Essentially, investors are less willing to pay a premium for companies because they are expected to grow at a slower rate.

There are two things to keep in mind here. The first is that fundamentals are still growing, and secondly, recent declines have already adjusted valuations. On growth, while slower than in the past, earnings in the U.S. continue to grow on top of past strong results. So, while the rate is slower, it is not as though revenues and earnings are in a state of decline. For better or worse, the economy and companies within it can't grow at ever higher growth rates indefinitely. On the valuation side of things, U.S. markets are now trading right around their longer-term averages for earnings in the 15 to 16 times range. Investors that were concerned about valuations in the past are now getting valuation levels that are much easier to digest. The TSX is also sitting right at the long-term valuation range around 16 times trailing earnings but facing a few headwinds with the energy industry.

We think it is important to remember that pullbacks and corrections can happen without a market crash or recession. Markets tend to follow the fundamentals over the long-term, leading us to believe that investors who can stick to finding growing companies with strong balance sheets will be well served.

TOP PICKS

SAVARIA (SIS.TO)

Savaria manufactures and sells accessibility equipment ranging from elevators to cushions. We like the long-term demand this company should see for products through an aging demographic. Revenues are expected to grow by 40 per cent in 2019 and the company now yields over 3 per cent. The recent selloff was due to a quarterly result that missed expectations, but the long-term growth path and demand for these products has not changed.

ANDREW PELLER (ADWa.TO)

We like the wine and spirits business and view it as almost a staple-like product. Peller holds roughly a 21 per cent market share in Canada and knows how to navigate the provincial landscape. Cannabis based drinks could pose some competition but could also be an opportunity for a company like Peller. The recent decline in shares offers a more attractive entry price for investors in our view.

A&W REVENUE ROYALTIES (AW-U.TO)

A&W is one of the only Canadian food chains posting such strong same-store-sales growth, up 13 per cent in the recent quarter and roughly 8 per cent over the year-to-date period. The yield is just shy of 5 per cent and the distribution is rising. A&W has done a good job at positioning itself in terms of brand and marketing and has also seen success with vegetarian menu options.

PAST PICKS

DOLLARAMA (DOL.TO)

• Then: $155.00   
• Now: $35.84      
• Return:-31%      
• Total return: -30%

BRP INC. (DOO.TO)

• Then: $46.99     
• Now: $44.19      
• Return: -6%
• Total return: -6%

DESCARTES SYSTEMS (DSG.TO)

• Then: $35.78     
• Now: $38.38      
• Return: 7%
• Total return: 7%

Total return average: -10%