Jennifer Radman is vice-president and senior portfolio manager with Caldwell Investment Management. Her focus is U.S. large caps.
Tricon Capital (TCN.TO)
Tricon is an asset management firm focused on residential real estate. It currently manages $2.7-billion in assets with 90 per cent of assets currently invested in the U.S., focused on the Sun Belt states. The company has four business units that cover different areas of residential real estate. The stock has materially underperformed the market and its peer group since August 2015. It seems that the reasons for its under-performance (a failed spin off of its land development business and the calling of a convertible debenture that created a sudden supply of shares) are temporary, and we therefore view this as an attractive entry point. The stock is trading at a significant discount to its net asset value (NAV); we believe the estimates underlying NAV are conservative and the discount does not reflect the growth opportunity across Tricon's portfolio. As Tricon announces further investments and grows its portfolio, and the temporary effects of the failed IPO and conversion subside, we believe the shares will re-rate higher.
CGI Group (GIB'A.TO)
CGI Group provides consulting and technology implementation and outsourcing services to various different businesses. It is a strong business with mid-teens return on equity and a significant portion of recurring revenue (60 per cent of total revenue), which provides stability during recessions. The company gives our clients exposure to what we believe is a long-term, secular trend of companies, across all industries around the world, using technology to transform every aspect of how they do business. It is having good success winning new contracts and offers compelling growth potential relative to its current valuation.
Steris sells equipment and services to hospitals and medical device and pharma companies. Its growth is tied to the number of surgical procedures performed, as its equipment goes in operating rooms and services include surgical instrument cleaning, sterilization and repair, and medical device sterilization. The company recently acquired a leading provider of outsourced sterilization services in the U.K. and is in the early stages of bringing that model to the U.S. The stock has significantly underperformed its medical device peer group, and we believe this is due to a number of temporary items that are likely to get resolved in the next 12-24 months. Looking beyond short-term headwinds, we believe there are a number of catalysts to unlock value, including underlying demographics which argue for continued growth in surgical procedures.
Past Picks: August 13, 2015
Robert Half International (RHI.N)
Then: $56.56 Now: $36.97 -34.64% Total return: -33.39%
Then: $174.57 Now: $186.78 +6.99% Total return: +9.48%
Cisco Systems (CSCO.O)
Then: $28.70 Now: $30.85 +7.49% Total return: +11.25%
Total Return Average: -4.22%
A key driver of the market this year has been expectations for when, and how aggressively, the U.S. central bank will raise interest rates. Most U.S. companies have now reported Q2 earnings, and results were not as bad as feared. The back half of the year is expected to see an increase in earnings, particularly as energy and materials stocks lap very weak results in 2015. Brexit was a historic event that introduces a lot of uncertainty, particularly to the European economy, but markets have gone on to make new highs. We think that the market is increasingly susceptible to this type of volatility but believe this latest episode provided some good lessons on how individual investors can improve their outcomes going forward. (For more detail, see our May/June investor note).