Steven Ko's Top Picks: Nov. 30, 2018

Steven Ko, founder and portfolio manager at Starvine Capital
Focus: Value stocks

MARKET OUTLOOK

There is plenty of noise these days in the markets.Tariff wars, a few words from Powell, more Trump tweets, and what we end up with is plenty of distraction.

Investors are clearly apprehensive about interest rate hikes and highly sensitive to any change in expectations. We may enjoy low interest rates for a while yet, but remember that markets are forward-thinking and interest rates directionally have only one way to go. And since all assets compete against each other for investment dollars, it's reasonable to expect increasing rates over the next several years to be a "gentle" headwind for equities.

Relative to historical patterns ranging back over 100 years, the S&P is still on the expensive side despite the October selloff. But all hope is not lost. Ultimately, great management teams and high quality companies will find a way to win. In today’s expensive environment, value still abounds from a bottom-up basis. One must stay disciplined, cut out the noise in markets when doing due diligence, and be careful however not to step on landmines. 

TOP PICKS

BAUSCH HEALTH COMPANIES (BHC.TO)
Recently purchased on Oct. 29, 2018 at US$21.79.

Still remembered by some as the "old Valeant," Bausch has been firing all cylinders in its continued recovery. I believe this company is in the third inning of its re-rerating as it still trades at a cheap valuation despite its ongoing success in stabilizing operations. In fact, organic growth has been reported on a consolidated for the last three quarters. Bausch actually owns high-quality cash flow streams, with its Salix and Bausch and Lomb divisions representing  about 75 per cent of sales. If the company continues on its current trajectory of organic growth and debt reduction, one can look out a few years and see that the leverage ratio will be at a more tenable level. By then, I expect the market to assign a “normal” market valuation to the stock.

CRH MEDICAL (CRH.TO)
Most recent purchase on Oct. 29, 2018 at C$3.87

CRH trades at a compelling valuation and is well positioned to benefit from aging demographics. A measured consolidation playbook of anesthesia practices associated with endoscopic and gastroenterology clinics in the U.S., provide its core business capital-lite and cash flow. Should the stock remain undervalued, patient shareholders stand to benefit from the ongoing normal course issuer bid.

TRISURA GROUP (TSU.TO)
Most recent purchase on Nov. 16, 2018 at C$26.84

This is a high-quality, small-cap financial company spun off from Brookfield Asset Management. Trisura is a specialty commercial insurer with a healthy growing Canadian division (Trisura Guarantee) and a nascent U.S. division. Trisura Guarantee is organically growing underwriting volume at a double-digit rate while producing significant underwriting income. The combined ratio for Trisura Guarantee was reported at 85.5 per cent and a return on equity of 15.8 per cent in third quarter. Meanwhile, the U.S. division employs a different business model called fronting, whereby recurring fee streams are locked in by ceding premiums to reinsurers. I believe the U.S. division will prove to be successful and its economics more visible within a few quarters.

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