Skip to main content
bnn marketcall

James Telfser.

James Telfser is a Partner and Portfolio Manager at Aventine Management Group. His focus in on Canadian equities.

Top Picks:

FirstService (FSV.TO)

FirstService is a high quality Canadian business that operates mainly as a property manager, but also owns and franchises a number of complementary businesses such as California Closets, Paul Davis Restoration and Century Fire Protection. We believe there is an excellent opportunity for FirstService to successfully grow their earnings in the low double digits organically over the next several years with upside potential into the high double digits through accretive acquisitions. The company has several levers to pull on the deal side, with the most attractive being the right to buy out franchisees at very reasonable multiples. We have been very impressed with this management team's ability to successfully deploy capital and have confidence that they will continue this in the future. We also believe there are significant margin growth opportunities in the coming years as they expand their property management business and acquire the rights to manage additional buildings previously run less efficiently. FirstService's businesses operate in highly fragmented market segments, and the vast majority of their competitors are mostly private/family owned (i.e. lower multiples on acquisitions). Ninety-four per cent of revenues are generated in the US and are highly recurring in nature, as the company enjoys exceptionally high renewal rates, as well as scale advantages in regards to their closest competitors in this space.

Horizon North Logistics (HNL.TO)

Horizon North provides remote accommodation and related services to the workers and executives of energy companies in Western Canada. In addition, they have recently increased their focus on permanent modular, which we believe offers a diversified revenue stream that is not currently built into estimates. While it has been a challenging couple of years for this industry as competition has created a tough pricing environment, we believe the companies with the strongest balance sheet will be in the best position to consolidate the industry and thrive in the coming years. Given that Horizon North raised $50 million of new equity capital in June 2015 at $3.75 (currently trades at $1.77) and the fact that a couple of their lodges were lost to the Fort McMurray fires creating large insurance proceeds (estimated at $30 million), we believe Horizon North fits the bill. In fact, we have already seen activity on the consolidation front, as Horizon North has purchased Empire Camps Ltd., a major competitor. With a well-covered dividend yielding 4.5 per cent and a trough valuation of only 7.5x trailing EBITDA, we see Horizon North as a very compelling opportunity.

Heroux-Devtek (HRX.TO)

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 landing gear, both commercial and military, and they are No. 3 in the world here by share, but No. 1 by profitability. The management team is very well-aligned with shareholders. The CEO (Gilles Labbe) – one of the original two executives who purchased the company from Bombardier in 1985 in a management buyout - still owns 10 per cent of the business and has proven to be both an excellent capital allocator, making strategic acquisitions and divestitures over the last 30 years, and a great business leader in building a Canadian engineering and manufacturing company with a strong culture of business excellence. We believe that now is an interesting time to own shares in the company as they have just finished a big capex spend ($105 million) to support a major new contract and will now begin to realize the benefit of additional free cash flow, revenue and earnings. We also believe there is a strong likelihood of continued consolidation within the worldwide market for landing gear manufacturing over the next few years, which adds to the optionality of owning a piece of such a company.

Past Picks: July 29, 2015

Hudson's Bay Company (HBC.TO)

Then: $26.50 Now: $18.21 -31.28% Total return: -30.49%

Mitel Networks (MNW.TO)

Then: $12.01 Now: $9.92 -17.40% Total return: -17.40%

Clearwater Seafoods (CLR.TO)

Then: $11.30 Now: $14.39 +27.35% Total return: +29.71%

Total Return Average: -6.06%

Market Outlook:

Frequent followers of our commentaries and outlooks will have noticed that the Aventine Canadian Equity Fund's exposure to cyclical value companies has risen in recent months. These are undervalued companies in cyclical industries that we believe will directly benefit from the upside surprises to growth and inflation.

While we are not expecting nominal economic growth to return to the 6 per cent range of the early 2000s, we do see acceleration in this respect, along with a number of other encouraging developments. We are increasingly confident in this allocation given the fact that "Low Vol" (or "quality") stocks are now, by a wide margin, the most expensive they have ever been versus Value stocks (with Value therefore the cheapest ever versus Low Vol), trading at multiple premiums of 10x on earnings and 3.5x on book value. We believe that the current discount for cyclical value companies is unjustified, based on fundamentals, and should begin normalizing in the coming months. This should be encouraging for broad markets as many of the sectors failing to reach new highs are categorized as cyclical.

The primary catalyst to trigger mean reversion here will be a re-acceleration of economic growth and inflation across the G-10. We are currently experiencing the strongest economic surprise performance in the developed world since 2014, and with global monetary and financial authorities keeping conditions extremely accommodative, we see a re-acceleration as likely in the short- to medium- term. Our risk models continue to read positively, and we are not having any trouble finding excellent undervalued businesses in this environment.

Interact with The Globe