Jason Donville is president and CEO of Donville Kent Asset Management. His focus is growth stocks.
Concordia Healthcare (CXR.TO)
Concordia is an international pharma company that trades at 4.0x 2016 earnings and below its projected year-end book value. Concordia has not been plagued by pricing or accounting issues, but it is highly levered and this explains its discount valuation. However, as the company moves through 2016 and pays down its debt, we think Concordia will re-rate significantly.
MTY Food Group (MTY.TO)
Montreal-based MTY has consistently earned an ROE in excess of 20 per cent over the past decade. MTY operates a number of fast food restaurant chains in Canada, and with the stock having been in consolidation mode for the past year and a half, now trades on 12.5x 2016 earnings, which we think is very reasonable for a steady growth company with an unlevered balance sheet.
CGI Group (GIBa.TO)
CGI Group is a Montreal-based IT services company with a global reach. CGI is a consistent 20-per-cent grower and a superb allocator of capital. The company is in the midst of buying back a large block of stock from the CDP, which will ensure another year of strong EPS growth and above market ROE. CGI trades on 12.8x 2016 earnings.
Past Picks: February 5, 2015
Valeant Pharmaceuticals (VRX.TO)
New comments: Sold most of our position at the end of November 2015. Current weighting is 0.5 per cent.
Then: $200.43 Now: $87.15 -56.52% Total return: -56.52%
Constellation Software (CSU.TO)
New comments: Our second largest position, with a 11.6-per-cent weighting.
Then: $376.15 Now: $527.72 +40.30% Total return: +41.69%
CGI Group (GIBa.TO)
New comments: Our largest position, with a 12-per-cent weighting.
Then: $50.88 Now: $56.40 +10.85% Total return: +10.85%
Total Return Average: -1.33%
The TSX last peaked in the Autumn of 2014 and has been in correction mode ever since. The Canadian market has been weaker than most other countries because of its high weighting in natural resource stocks and the effect the price of oil has had on the Canadian dollar. As such, while the TSX has rebounded nicely over the past month, we still consider it to be an oversold market.
Looking ahead, it is hard to see economic growth anywhere in the world given low demographic growth in virtually all western countries and many emerging markets. However, pockets of growth exist everywhere, including Canada. Health care stands out as a sector that offers compelling growth and valuation opportunities and the technology, consumer and financial sectors also offer some bargains.
For investors in Canadian equities, the past six months have been particularly volatile and remind us that trying to rapidly trade stocks through a volatile market is both stressful and costly. Investors should focus on companies that have enduring competitive advantages and be prepared to hold these stocks through choppy waters. High ROE stocks, which is our area of focus, offer both growth and a certain measure of protection that comes from their competitive positions and is reflected in their margins.