William Chin, portfolio manager at Caldwell Investment Management
Focus: Technical analysis and macro portfolio strategy

_______________________________________________________________

MARKET OUTLOOK

This is a challenging time for investors. There are many cross-currents in the markets. There’s fiscal stimulus in the U.S. through tax cuts, but America is also generating tremendous amount of trade tensions that hinder investment decisions. We haven’t seen the full impact, yet. The Federal Reserve is restricting liquidity by raising interest rates and shrinking its balance sheet. This strengthens the U.S. dollar but hurts emerging markets, which in turn could hurt the credit markets. We just had an episode with Italy, but the problem really lies with the eurozone’s “one size fits all” regime. Given all these, The Federal Reserve is still very determined in raising interest rates and the Bank of Canada has just switched to a more optimistic, or some would say “hawkish” tone. A housing correction and NAFTA don’t seem to bother them too much.

In the meantime, the world is benefiting from all the innovations made possible by technology. The NASDAQ made an all-time closing high yesterday is case in point. Therefore, it’s important to own the right stocks and not just buying an index or ETF as in passive investing: Buy the best and skip the rest. If you look hard enough, there are stocks out there that have their own growth story and are capable of doing well even with these macro/international challenges. Active management is always important and even more obvious these days, and it’s the key feature of our firm.

TOP PICKS

ATS AUTOMATION (ATA.TO)
Last bought at $18.05.

ATS is an industry leader in planning, designing, building, commissioning and servicing automated manufacturing and assembly systems for a diversified client base. Their segments include healthcare and life sciences (49 per cent of revenue), transportation (27 per cent of revenue), energy (13 per cent of revenue) and consumer products (12 per cent of revenue). We like ATS for the following reasons:

• Early innings of automation trend. Companies are increasingly utilizing products from companies like ATS to improve manufacturing efficiency, which helps increase production, lower costs and ultimately improve competitiveness. ATS is a partner of choice given their strong track record and global scale.
• Strong growth drivers. ATS sees particularly strong growth in several areas. In the healthcare segment, growth is driven by cost pressure on manufacturers as well as more stringent regulations. Growth in the transportation segment is driven by the continued penetration of electrified vehicles. Furthermore, ATS has a robust pipeline of acquisition targets, which should provide a nice compliment to its organic growth opportunities.
• Potential margin expansion. ATS brought on a new CEO in early 2017 who’s driving a culture of process-driven improvement with the expectation to drive approximately 500 basis points of margin expansion in the medium- to long-term. 

MARTINREA (MRE.TO)
Last bought at $11.67.

Martinrea is a tier 1 auto supplier that provides parts to major auto original equipment manufacturers (OEMs). Segments include: fluid management (engineering and manufacturing products to store and transport fluids), metal forming (body and chassis systems, engine blocks, transmissions) and aluminum products (same type of products as metal forming, but made with lightweight aluminum). We like Martinrea for the following reasons:

• Strong position in light weighting. Regulations are driving better fuel efficiency, which is often achieved through the "lightweighting" of vehicles by using higher strength-to-weight metals like aluminum and stainless steel. We’re in the early innings of this trend and Martinrea is well-positioned here.
• Margin improvements. The company has executed well on improving margins and expects to continue improvements over the next few years. Drivers of the margin improvement are: better pricing/mix benefits (more discipline on pricing and shift to higher margin light-weight aluminum), normalization of costs following the launch of new facilities, better capacity utilization (new facilities being put to work) and more efficient operations.
• Attractive valuation. Martinrea, like many autos, trades at a substantial discount to the index and we believe the "peak auto fear" is the primary driver (other reasons include electrification of cars, autonomous cars and Trump potentially changing NAFTA). The stock also trades at a further discount to their auto supplier peer group despite better-projected growth. We believe there’s a good probability that their multiple gets rerated upwards.

TRICON CAPITAL (TCN.TO)
Last bought at $8.73.

Tricon Capital is an asset manager focused on real estate in the high-growth Sun Belt states. They operate mainly in three segments:

1. They buy, develop and resell land to home builders;
2. They have a portfolio of single family houses that they rent, effectively institutionalizing the traditional ‘ma & pa’ rental market;
3. They’re developing and renting out luxury apartment buildings in major urban cities, namely Toronto.

We like Tricon for the following reasons:

• Diversified and opportunistic real estate exposure. Tricon is a diversified way to play the recovery in the U.S. housing market. We specifically like their exposure to the Sun Belt, which is experiencing growth above the national average. They invest in land and houses directly, receive consistent rental income, and also get management fees for side cars that they manage. Unlike a REIT, they’re very flexible and opportunistic in their investments, which allows for greater potential returns over time.
• Attractive single family housing rentals (SFR) segment. Tricon has a good formula in place in which they’re essentially institutionalizing the SFR market: they buy a single family house in a growing market, complete some minor renovations and upgrades, increase the rent accordingly, centralize the maintenance costs and often get the added benefit of housing price appreciation. Tricon recently made a large and accretive acquisition in the SFR segment (Silver Bay Realty), which significantly grows its earnings power.
• Compelling valuation. They trade at an attractive multiple that we believe doesn’t properly factor in their potential growth.

PAST PICKS: JAN. 26, 2018

AGF MANAGEMENT (AGFb.TO)
Bought at $7.67 and sold at $7.15. AGF had negative-price momentum after the February sell-off. It was a risk management move.

• Then: $7.83
• Now: $6.55
• Return: -16%
• Total return: -15%

AG GROWTH (AFN.TO)

• Then: $58.12
• Now: $59.34
• Return: 2%
• Total return: 4%

EMPIRE CO. (EMPa.TO)

• Then: $25.00
• Now: $24.80
• Return: -1%
• Total return: -0.4%

Total return average: -4%