Full episode: Market Call for Monday, March 19, 2018
William Chin, portfolio manager at Caldwell Investment Management
Focus: Technical analysis and macro portfolio strategy
Stock markets in North America are having rather different experiences in recovering from their February corrections. The S&P 500 Index, the broadest one, is well off the lows from that correction, but still unable to completely regain lost ground. The Nasdaq, however, made a new high but then stalled. The TSX is still struggling below a key resistance level and in a short-term bearish setup. Technicians like to talk about market breadth; are stocks all going up together? If that’s the case, the markets are healthy. But in this case, as investors, we got some work to do.
The Canadian economy is increasingly showing signs of stress. Housing data, personal consumption and some key components of trade are all facing challenges. The Bank of Canada has changed its tone somewhat, realizing that this might not be the best time to raise interest rates. As a result, the loonie is falling against the U.S. dollar and we expect more to come. This week we have the Federal Reserve meeting and it’s expected to raise interest rates by another quarter of one per cent, adding to the complexity.
Times like these highlight the need for active management, which is one of the key features at Caldwell. When you have a team of professionals working for you full-time, chances are we can separate the good stocks from the rest.
CGI GROUP (GIBa.TO)
Most recent purchase price: $68.22 (topping up).
CGI Group manages IT and business process services for clients, including outsourcing and system integration and consulting. We like CGI Group for the following reasons:
- Strong secular trend for consulting. As the global environment becomes increasingly competitive and as the technological landscape becomes increasingly complex, companies are relying more on IT consulting firms like CGI to stay competitive. We see this as a trend that will continue for the foreseeable future.
- Improving growth profile. Organic growth and future bookings have improved in recent quarters. We believe growth will continue to improve on better spending in several markets, with particularly strong demand in digitalization. Furthermore, CGI has winded down much of their lower margin contracts and are replacing these with higher margin contracts.
- Potential M&A. CGI has a strong track record of acquisitions. The pipeline remains strong, with several large potential deals available. CGI has the means to pursue such acquisitions if they’re a good fit.
ATS AUTOMATION (ATA.TO)
Most recent purchase price: $16.55.
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: The healthcare segment, driven by cost pressure on manufacturers as well as more stringent regulations; and the transportation segment, 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 that is 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.
EMPIRE COMPANY (EMPa.TO)
Most recent purchase price: $23.63.
Empire Group is a food retailer through wholly owned subsidiary Sobeys. Sobeys owns/franchises 1,500 stores in 10 provinces under retail banners of Sobeys, Safeway, IGA, Freshco and others, as well as 350 retail fuel locations. We like Empire Group for the following reasons:
- Turnaround story. Empire has struggled over the past several years due to a series of operational miscues, mainly their poor integration of the 2013 Safeway acquisition (for example the elimination of the Safeway private label brand and its loyalty program, both popular with customers), but also heightened promotions, which deteriorated margins. Empire has recently brought in an experienced and operationally focused senior management team that put "Project Sunrise" in place — a plan that aims save $500 million annually by 2020 through various cost saving measures (corporate restructuring, a shift to a centralized structure from its current regional one, new IT systems and an improved procurement process with vendors). We believe the stock will react positively as they execute on this plan.
- Recent improvement in top line. After an extended period of deflationary grocery environment in Canada driven mainly by an influx of competition, the industry appears to have stabilized (evidenced by a recent return to food inflation) as the market has better absorbed the competition. This return to inflation combined by several marketing and pricing initiatives of the new management team has had a positive effect on Empire's same store sales. This is a trend we believe will continue in the near future.
PAST PICKS: DEC. 29, 2017
CGI GROUP (GIBa.TO)
- Then: $68.30
- Now: $75.81
- Return: 10.99%
- Total return: 10.99%
CHORUS AVIATION (CHR.TO)
- Then: $9.65
- Now: $8.26
- Return: -14.40%
- Total return: -13.64%
AG GROWTH (AFN.TO)
- Then: $53.34
- Now: $54.85
- Return: 2.83%
- Total return: 3.55%
Total return average: 0.3%
Caldwell Canadian Value Momentum Fund
Performance as of Feb. 28, 2018
- 1 Year: 12.9% fund, 3.2% index
- 3 Year: 11.7% fund, 3.4% index
- 5 Year: 11.3% fund, 6.9% index
* Index: S&P/TSX Composite Total Return Index