StoneCastle's Bruce Campbell
Bruce Campbell is president and portfolio manager at StoneCastle Investment Management. His focus is on Canadian equities.
Top Picks:
Patient Home Monitoring (PHM TSX-V)
Patient Home Monitoring has been growing both by acquisitions and organically. Patient Home Monitoring has very little competition from an acquisition standpoint and has announced a pipeline of 19 potential acquisitions that are currently in active negotiations. Management has done a fantastic job of cross-selling and driving organic growth in past acquisitions. In fact they are seeing organic growth in the 20-per-cent annual range. The company is profitable and will be able to fund future acquisitions from their balance sheet and cash flow.
Slyce (SLC TSX-V)
The company provides visual imaging technology that allows users to take a picture with their mobile phone, identify the item and then purchase it from a retailer. They are working with 18 major retailers and will be rolling out apps for those retailers over the next year. The company has a revenue model that generates revenue from four sources. They have locked in revenue for 2015 and are projected to be cash flow positive in 2016.
Concordia HealthCare (CXR TSX)
Concordia is a diversified specialty and health-care company focusing on the acquisition of legacy pharmaceutical drugs. As Big Pharma continues to focus on new blockbuster drugs, many have chosen to dispose of their legacy off-patent drugs. Concordia has been acquiring these drugs, building a diversified portfolio generating positive cash flow. Concordia's management has indicated they have several acquisition targets in the pipeline that could double the current EBITDA if successful. Currently, the stock trades at 12.5 times forward earnings. This is a significant discount to the peer group, with a higher growth rate. After a rapid rise from January to May, the stock has spent the summer consolidating. Further acquisitions could produce the opportunity for a dividend increase.
Past Picks: October 16, 2013
Auto Canada (ACQ TSX)
Then: $38.67; Now: $55.54 +43.63%; Total return: +46.00%
Air Canada (AC.B TSX)
Then: $4.99; Now: $7.97 +59.72%; Total return: +59.72%
Alimentation Couche-Tard (ATD.B TSX) stock split, April 23, 2014: 3-for-1
Then: $69.36; Now: $35.84 +55.12%; Total return: +55.79%
Total return average: +53.84%
Market outlook:
Back in September, we talked about the markets producing very different results over the short and long term. We thought we could perhaps see a correction in October but had no idea it would be as volatile as it has been. We also mentioned that the November-to-May time frame is historically the market's strongest time.
Are we entering a new bear market? Bear markets typically begin 6 months prior to a recession starting. The North American economy continues to expand as measured by dropping unemployment claims and the rising leading economic indicators. The U.S. Leading Economic Index continues to surprise to the upside and is comfortably above the 18-month moving average.
Two factors that often lead to a market top are not in place today: an oil price rise and an interest rates rise. When oil prices rise by more than 80 per cent over a 12 month period, this is often a precursor to a selloff as the economy slows down. In fact the opposite is happening right now – with the price of oil dropping into the $80s (U.S.), this provides a huge stimulus to the consumer. Consumer spending accounts for two-thirds of the U.S. economy. It is estimated that for every one cent drop in the gasoline price, it puts one billion dollars into consumers' pockets. Gasoline hit a high of $3.76 per gallon in June and has now dropped to $3.29 on October 13. That equates to $47-billion in savings.
The second factor that can lead to a bear market is an inverted yield curve. Today, short-term rates are comfortably below longer-term rates. This will begin to change when the U.S. Federal Reserve moves from an accommodative interest rate policy to a tighter monetary policy. Many economists are forecasting this to occur in 2015, but this has been called into question in the last few weeks with slower economic activity.
Technically, there has been some major damage done to the markets. Last week's relief rally stopped the markets at a very critical point. We are watching several major indicators to ensure they continue to hold their support. If these levels hold, this will be a great place to add to positions or high grade portfolios to take advantage of the recent weakness. If we see more downside and technical damage, investors may need to remain patient before the next leg up in the markets begins.