Market Outlook for 2020

Market Outlook for 2020

The following is the opinion of Canadian technical analyst Leon Tuey...I’m not one who necessarily likes to get into predictions but there are always exceptions. Take the following comments with a grain of salt. They are the opinion of a very good, seasoned technical analyst who has a good track record and is not an ego-maniac like so many in the industry.

Technical analyst Leon Tuey identified the start of the current North American equity bull market many years ago. He continues to believe that there is much more upside left. He noted on Dec. 5 noted that in May, gold broke out of a six-year base and that it appears headed significantly higher. U.S. WTI oil has traded above US$60 and from a technical analysis perspective looks to be headed 55 per cent higher to US$93. The price of lumber bottomed in May 2019 and also appears to be headed higher. The forecast rise in all of these commodities would be very positive for the TSX in 2020.

Mark Deriet, quantitative and technical analyst at Cormark Securities, recently recommended continuing selling defense stocks in favour of cyclicals. His breadth measures bottomed in December 2018 and the last time it happened before that on February 2016, cyclicals outperformed defensives by 33 per cent. We expect this rotation will benefit the relative performance of TSX stocks In the coming year. After a potential intermediate correction in the first quarter, we expect North American equities will continue to move higher over the coming year.

Resources,
Robert Mcwhirter,

BNN-Bloomberg

Stephen Takacsy on BNN-Bloomberg’s Market Call – Dec 12, 2019

Stephen Takacsy on BNN-Bloomberg’s Market Call – Dec 12, 2019

Market Outlook

Equity markets have been strong in 2019 as fears of an impending recession faded and central banks cut interest rates, they’re now trending sideways as the U.S.-China trade war drags out and corporations start feeling the impact. Large caps have become very expensive as a result of passive ETF investing to the detriment of small- and mid-cap stocks, which have gotten even cheaper. Michael Burry of The Big Short fame recently called this phenomena a “bubble.” He’s investing heavily in small-cap value stocks around the world. We also see many good long-term opportunities in the neglected and mispriced Canadian small- and mid-cap sector at valuations well below private market values. IPOs such as Uber priced at ridiculously high valuations signaled a market top for money-losing tech stocks, which are now starting to deflate with WeWork’s failed IPO and valuation now a fraction of the last private equity round.

Top Picks

Mediagrif Interactive Technologies (MDF)

This Quebec-based technology company has two business segments: business-to-business e-commerce platforms which are growing, and business-to-consumer websites which are declining (Jobboom and Reseau Contact). The stock collapsed this year when the company made huge write-offs in its business-to-consumer segment, which is being sold, and also eliminated its dividend since it wants to deploy cash to grow its other segment. Its new CEO, Luc Filiatrault, just announced his first large acquisition. Filiatrault has a very successful track record of creating shareholder value in the tech space, having sold businesses to large corporations such as OpenText. The business-to-business platforms generate high margin recurring revenues, and the company is worth at least $9 to $10 per share today based on a modest two times revenues.  It’s a great time to buy the stock as it is under tax-loss selling pressure and most investors have not bothered to understand the company’s new strategy. We recently purchased a block at $6.

Logistic Corp (LGT.B)

Logistec is a leading Montreal-based marine cargo handler and environmental services company. It owns marine terminals in over 30 ports in Eastern Canada and the U.S. The company’s environmental division provides site remediation and trenchless water pipe repairs using their AquaPipe proprietary technology. Logistec is an infrastructure play on two fronts: port facilities, which are currently commanding high valuations by pension funds, and the repair of aging North American drinking water systems, which will benefit from increased government stimulus spending. The stock came down on integration issues with the recently acquired Fer-Pal, their main water pipe contractor in Ontario, but results are improving. Environmental backlog is strong while the marine business is booming. We expect earnings to be up this year to between $2.10 and $2.40 per share, so the pull-back from the stock’s high of $55 represents an excellent buying opportunity. They increase dividend yearly and regularly buy back stock. Strong management. No analyst coverage. Recently topped-up below $38. 

Badger Daylighting (BAD)

By far North America’s largest operator of hydrovac services (excavation by high water pressure trucks) used in the municipal, utilities and oil and gas sectors. Badger has been generating record results due to strong growth in the U.S. The company now generates 70 per cent of its business in the U.S., which is expected to double over the next three to five years since hydrovac services are still new in many parts of the country and infrastructure spending is growing. Shares have declined on weather-related issues and temporary enterprise reason planning expenses, and are now trading at a cheap valuation in relation to its growth rate. Badger has been aggressively buying back stock and insiders have been buying shares as well. We recently purchased more stock in the low $30s.

Stephen  Takacsy, CEO and chief investment officer, 
Lester Asset Management

James Telfser on BNN-Bloomberg’s Market Call – Dec 9, 2019

James Telfser on BNN-Bloomberg’s Market Call – Dec 9, 2019

Market Outlook

We believe the current investing environment is more balanced from a risk/return standpoint versus a couple months ago. While financial conditions, breadth and credit metrics continue to improve and many recent geopolitical risks have receded, we’re more cautious about valuations at current market levels. We continue to hold modest amounts of cash in our private client accounts to take advantage of any short-term volatility. However, given the bottoming of global economic data, the fact that the U.S. Federal Reserve has started expanding its balance sheet again and that there’s favourable comparative periods to next year, we’re more invested now than at any point during 2019.

Our private client accounts have been taking advantage of valuation discounts with small-cap non-resource equities in Canada and have increased their U.S. large-cap equity exposure through our large-cap dividend growth strategy. With interest rates looking like they will continue to stay lower for longer, we believe that owning large-cap diversified dividend growers in the U.S. (and Canada) over traditional fixed income assets is very attractive.

Top Picks

Akumin Inc (AKU)

Akumin has been executing well on their business plan of acquiring and operating diagnostic imaging clinics primarily focusing on MRI and CT Scans in the U.S. They’re now the number 2 player in North America behind RadNet, with 130 centres. Their business has several strong macroeconomic tailwinds, most notably demographics. Akumin should also benefit from operating leverage as they continue to scale. We expect strong volume growth as insurance companies encourage patients to utilize independent clinics versus the more expensive hospital centres. While growth has been robust (more than 50 per cent on revenue in the last 12 months), we’re even more impressed with the margin profile at more than 20 per cent on EBTIDA and their ability to integrate new acquisitions. Given their execution to date, we believe that the current multiple of 5.5 times EV/EBITDA is far too low and remains out of line with the peer group and other consolidators. We consider this level to be an excellent entry point as the next phase of their business plan unfolds, resulting in enhanced organic growth and free cash flow.

Firstservice Corp (FSV)

FirstService is the largest property management company in North America and is also a leading provider of property services. The management team has a long history of impressive capital allocation. We particularly like the fact that FirstService has several levers to pull for growth, both organically and through acquisitions. Given the stock price weakness following their Q3/19 results, we believe it is an attractive time to add FirstService to portfolios. The recent share price weakness was driven by difficult year-over-year comps from storm-related restoration work in the U.S. All other underlying business trends remain strong. While valuation is in line with historical levels, the recent correction has provided an opportunity. It is not unreasonable to expect 5 to 10 per cent organic growth and 5 to 10 per cent acquisition-oriented growth going forward, providing a very attractive return profile in a stable industry.

Heroux-Devtek (HRX)

Heroux-Devtek specializes in the design, development, manufacture, repair and overhaul of systems and components used in aerospace and industrial sectors. A large part of their business is focused on aircraft landing gear for both the commercial and military segments. The company is the no. 3 player globally by market share, but no. 1 by profitability. It is now an appropriate time to own the shares, as the company has recently completed a large capex program to support a major new contract and is integrating recent acquisitions (Beaver and CESA). We believe the company will now begin to realize the benefit of additional free cash flow, revenue and earnings. Expectations are currently very low and as a result we should see earnings beats and guidance raises, which have historically rewarded equity holders. The current valuation (8 times EV/EBTIDA) is at a discount to history and peers, a gap we expect it will close in the next few quarters.

James Telfser,

Aventine Asset Management