MARKET
OUTLOOK
We believe the current investing environment is more
balanced from a risk and return standpoint versus a couple months ago.
While financial conditions, breadth and credit metrics have all improved, many
recent geopolitical risks have receded and we are more cautious about
valuations at current market levels. We continue to hold a modest amount
of cash in our accounts to take advantage of any dislocations to the seemingly
“perfect” narrative we keep hearing. We will get more constructive on
equities if we can get more comfort that global growth and earnings have
bottomed, as currently it looks like Q1/19 estimates are expected to be
negative year-over-year while Q2/19 is deteriorating as well.
Our private client accounts took advantage of the sell off
over the last four months by adding to equity positions from our core Canadian
and U.S.
TOP PICKS
Market Call Top Picks
EVERTZ TECHNOLOGIES (ET.TO)
Evertz is a global leader in the broadcast technology industry
and they are positioned to disproportionately benefit from the upgrade cycle to
cloud-based media delivery. The company has demonstrated exceptional internal
returns and smart capital allocation practices over a long period of time and
is trading at an undemanding valuation while yielding 4.5 per cent. We have a
high probability 12-month expected total return for Evertz in excess of 25 per
cent with the potential for additional upside from transaction-related
catalysts. One interesting aspect of the company is the incredible
alignment of interests as insiders own roughly 65 per cent of the firm.
ATS AUTOMATION TOOLING
SYSTEMS (ATA.TO)
ATS is a custom engineer and producer of automated
manufacturing systems. The current trends towards robotics and automation
across all industries makes this a stock with significant tailwinds. We
have been impressed with ATS from an operational and management team
perspective as their new CEO, Andrew Hider (from Danaher), has refocused the organization
on driving shareholder value. Their backlog has been very strong and we
believe that recurring revenue is going to increase over the next few years
through support services which will further stabilize their operations and
increase margins. This along with their appetite for acquisitions should
improve the valuation multiple which is current at a significant discount to
peers at nine times expected enterprise value to earnings before interest tax
depreciation and amortization (EV/EBITDA).
CCL INDUSTRIES (CCLb.TO)
CCL has been a great holding for us over the years and after
watching the valuation for this label manufacturer fall from a peak at 27 times
price-to-earnings (P/E) in 2016 to the current high-teens level, we believe it
is time to start revisiting the name. They have struggled over the last
few quarters, along with most packaging companies, as increasing resin prices
and the general economic slowdown has impacted their growth trajectory as well
as margins. Despite the short-term hiccups it is important to recognize
that CCL is a best in class company with a strong management team and excellent
prospects for both organic growth and acquisitions. CCL has done an
exceptional job buying competitors and businesses operating in similar
industries and helping them bring more of the “Best manufacturing practices” to
their businesses while still encouraging and regarding local decision making.
At the current valuation at 19 times this year’s earnings, coupled with a
strong balance sheet (One times net debt to earnings before interest tax
depreciation and amortization) we believe investors will be rewarded as the
company executes going forward.
James Telsfer, Aventine Management Group
James Telsfer, Aventine Management Group
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