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Patrick Horan is a principal at Agilith Capital. His focus is North American equities.

Top Pick

*Short* Enbridge Inc. (ENB TSX)

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The stock is trading at 24x forward earnings and has a below-market dividend yield and is perpetually tapping the market for new equity. The company has benefited from the low variability of earnings and low interest rates, but for the past two years, every time they raise their dividend, they follow it up with an equity issue, which makes no sense. We think that future growth is dependent upon continued access to capital markets, and if those conditions stop being as universally favourable as they have been, the business model will suffer.

Avigilon (AVO TSX)

The stock is still at a significant discount to the highs of last year. The big question is whether the growth business model is intact, and we firmly believe that it is (end-to-end solutions for HD surveillance. In a rapidly growing and fragmented market – AVO is a market leader). We believe that they are on track to deliver more than $500-million run rate of revenues in two years and have the potential to generate closer to 30-per-cent margins. This implies that the company is currently trading at roughly a 6x EV/EBITDA multiple off of these numbers.

Evertz Technologies (ET TSX)

Evertz supplies hardware and software to the broadcasting industry. They are benefiting from the ongoing conversion to HD, global multichannel universe as well as multi-casting (the ability simulcast across multiple platforms) and are gaining market share. There are still further upgrade cycles to come (ie 4K) that Evertz should also benefit from. Evertz is a market leader in the industry although not that well known to the public. They have a strong management team that is very disciplined about growth as well as returning cash to shareholders – have a 3.6-per-cent yield.

Past Picks: June 5, 2013

Bombardier (BBD.B TSX) – Sold out of BBD in January 2014 with the further delay of the C-Series. The delay meant that the balance sheet became significantly more risky

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Then: $4.86; Now: $3.84 -20.99%; Total return: -18.64%

Martinrea International (MRE TSX) – continue to hold this as a top position. The lawsuit from Nat Rea has been a red herring and all charges have been dropped. The stock remains very inexpensive relative to its peers.

Then: $9.77; Now: $12.27 +25.59%; Total return: +27.12%

*Short* Fortis (FTS TSX)

Then: $31.24; Now: $32.25 -3.23%; Total return: -7.44%

Total return average: +0.35%

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Market outlook:

We continue to believe that we are in a long-term secular bull market that started about 5 years ago. We think that there is another 5 years or so still to go. Equity returns are fair at current levels, given earnings and where we are at in the business cycle, but equity values are cheap relative to other asset classes such as fixed income and will seem very cheap in even a mildly inflationary environment. We believe that the underpinnings of economic improvement are well established and that the North American economy will continue to gain momentum (especially the U.S.) and bond yields will ultimately succumb to upward pressure. As a result we want exposure to business models with future pricing power and so we are focused on industrials, financials and technology.

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