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James Telfser.

James Telfser is partner and portfolio manager at Aventine Management Group. His focus is on Canadian equities.

Top Picks:

Hudson's Bay Company (HBC.TO)

Hudson's Bay has been on our radar for the past year given their ability to execute transformational deals in retail and real estate. We believe their recent purchase of German department store Kaufhof, as well as their agreement to sell many of the properties to a real estate joint venture (which they will own a large percentage of) has created a lot of value that is not being captured in the current share price. It is clear that their entry into Europe was well thought out as management mentioned they have been studying the German market since 2006. Given their extensive due diligence, we believe that they likely have a few more global department store chains in their crosshairs. We conservatively value the shares on a sum-of-the-parts basis at around $35, meaning they are currently trading at a 25-per-cent discount which we view as much too large.

Mitel Networks (MNW.TO)

We believe Mitel Networks is an undervalued and misunderstood story. Mitel is a provider of business communication software/services over the internet. It is in the process of moving its clients to the cloud as opposed to being onsite (less equipment required), which is a higher margin business but changes their revenue recognition. It looks like they are making less today, which is the case, but they will make much more in the future. While their revenue growth is only expected to be 1-3 percent organically without acquisitions, they recently acquired Mavenir Systems ($560-million+ deal), which has been growing revenues at 25 per cent. It was a transformative deal for them and will make up close to 20 per cent of their revenues going forward. Mitel is a cash flow generating machine that boasts a free cash flow yield of close to 5 per cent, so they are in a good shape to fund this acquisition. Mitel is only trading at 9 timesx our expected earnings and we believe that once the market sees 5-8-per-cent revenue growth from the Mavenir deal the multiple will expand.

Clearwater Seafood (CLR.TO)

Clearwater seafood is involved in the harvesting, processing and distribution of seafood around the world. They recently missed expectations in the first quarter and the shares have traded down as a result. Clearwater enjoys large barriers to entry based on the fishing quotas they control, but they are also benefiting from the lower Canadian dollar, lower fuel costs and the continued strength in fresh seafood pricing. While we were disappointed with their last quarter and do not have high expectations for the upcoming quarter, we believe the issues are temporary and that they are in store for a strong second half as their new claim vessel (launched this week) starts generating incremental EBITDA and they experience their typical seasonal strength. In addition, we are intrigued by their recent $55M bought deal which we believe has the potential to fund an acquisition (insiders took $15-million of the issue). Clearwater is trading at a reasonable 9.0 times our expected EBITDA, which we believe is an excellent valuation to initiate a position.

Past Picks: September 12, 2014

easyhome (EH.TO)

Then: $23.53; Now: $17.00; -27.75%; Total Return: -26.47%

FirstService (FSV.TO)

*Price adjusted - Split into 2 companies*

FirstService Corporation (FSV.TO) & Colliers International (CIG.TO)

May 27, 2015: $28.26; Now: $38.46; +36.10%; Total Return: +37.00%

Sandvine (SVC.TO)

Then: $3.02; Now: $3.62; +19.90% Total Return: +19.90%

Total Return Average: +10.14%

Market Outlook:

These are challenging times for investors, fraught with risk, but not without opportunity. After a period of relative market stability, current events serve to remind us just how interconnected the global financial system is and how fast risk is transmitted across oceans. While we are hopeful that coordinated stability across economies and asset classes can be found by policy makers and market participants, we must acknowledge that there are an increasing number of scenarios that could result in negative outcomes for equity markets. As such, our thoughts immediately turn to capital protection, and over the past month we have been investing a little more cautiously while reducing long exposure.

At the time of writing, the Aventine Canadian Equity Fund ("ACE Fund") has long exposure, net of cash and short positions is 75 per cent. Taking into account our options positions our net exposure falls to around 60 percent. While it certainly wouldn't be enjoyable, the current portfolio of longs and hedges is well positioned to successfully weather a period of extended volatility if need be. Our long exposure continues to be focused on undervalued businesses that predominately derive sales outside of Canada, which has been working quite well in this environment (ACE Fund up 8.5 per cent in 2015 year-to-date compared to the TSX at a loss of 2.2 per cent. While commodity prices have been extremely weak, we are awaiting more evidence on the direction of global growth before changing our current sector allocation.

Given the Fund's low net exposure and high cash balance, we are building a shopping list with the intent of seizing any opportunity to add to core positions or build new ones in undiscovered or under-appreciated Canadian companies should they go "on sale". As noted above, there are many such scenarios that, through chaos, lead to opportunity and our research in this regard is incessant.

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