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Three top stock picks from Lightwater’s Jerome Hass

Jerome Hass is portfolio manager at Lightwater Partners. His focus is Canadian mid-large caps and short-long strategies.

Top Picks:

NXT Energy

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We have been buying more shares last week and continue to buy; we have owned the name for over a year. Technology used to identify anomalies for oil & gas prospects that had previously been detected using conventional means. Stress Field Detection is a fraction of the cost of 2D or 3D seismic. Approximately 10 to 30 times cheaper and much less time consuming. SFD doesn't replace seismic, it makes it way more efficient and SFD survey can be used to identify and narrow down prospects containing potential reservoirs, which can then be further explored by seismic surveys. This should help in saving time and exploration dollars.

Pemex is its largest customer; validated tech via academic paper. NXT has very low operating cost and is a very high-margin business. NXT should have $13-million in sales in 2013 and has potential to double sales each year for next 3 years. 'Vertical' JV is likely in 1H 2014. NXT is under-covered; only one sell-side Analyst covers the stock.

Counsel Corp.

We bought more shares ahead of the Q3 results (Nov. 14) between $2.20 and $2.50; we initially bought in mid-July 2013 at $1.78. Through the brand name Street Capital, Counsel Corp. is a mortgage lender and administrator of single family mortgages. It disposed of non-core businesses to focus on financial services and it matched home-owners with financial institutions. CXS immediately sells the mortgage to a financial institution but continues to administer the mortgage. CXS books an upfront fee for arranging the transaction but it continues to administer / service the mortgage. In this way it maintains its relationship with the home-owner. This is an important detail when mortgages come up for renewal; CXS earns 2.5x the profit margins on renewed mortgages as first time mortgages.

What's exciting about CXS at this point is that it has been in business for five years now, so the typical 5-year fixed mortgage is coming up for renewal; hence, CXS should see impressive growth in profitability going forward. Street Capital targeted capture of mortgages available for renewal is ~75-80 per cent. It applied for a bank license which will provide an additional liquidity source from deposits.

Horizon North Logistics

We have held the shares for more than a year; we significantly increased our weight in the stock in April / May 2013 around $6. We have held the shares for more than a year; we significantly increased our weight in the stock in April / May 2013 around $6 when the stock was sold off.

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Why the sell-off? Investor fears about capex in the oil sands and their long-term viability, in particular, Suncor, its largest customer; also sensitive to the crude oil differential in western Canada.

Indirect play on the Resource Sector: HNL is a key supplier of temporary accommodations and matting in western Canada. It has stable revenues: long-term contracts, much of the fleet contracted already for 2014. The stock traded off heavily in Q4 2012/Q1 2013 on fears of declining capex in the oil sands and the future of state run enterprises there. Management typically funded much of the capex via its massive cash flows.

The company is more than oil sands. Industry growth is not confined to oil sands: there are potash, gold and copper mining projects, North Dakota Bakken, hydro projects in BC and Manitoba, proposed west coast LNG would add a further 16,000 beds. It is a high-growth industry. Given the large scale, long-time horizon nature of oil sands and other resource projects, total industry demand for temporary work force accommodation in western Canada is expected to grow by 50,000 beds over the next 4-5 years representing a CAGR of 18 per cent. HNL has a cheap valuation, trading at 14x PER 2014; 6x EV / EBITDA 2014; 2.7-per-cent yield and 36-per-cent payout ratio.

Past Picks: SEPTEMBER 18, 2013

Short: Reitman's
Then: $7.71
Now: $6.02
Total return: +21.80%

Long: Patient Home Monitoring
Then: $0.26
Now: $0.28
Total return: +5.77%

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Pair Trade: Long Enercare
Then: $9.57
Now: $9.94
Total return: +5.72%

Short: Just Energy
Then: $6.85
Now: $7.56
Total return: -13.66%

Total return average: : +6.54%

Market outlook:

Tis the season – for Christmas cheer and stock market predictions for the coming year. The popularity of this exercise in the investment industry cannot be based upon its accuracy. The average forecast for the S&P 500 index return for 2013 missed the mark by a country mile – about 16 per cent. Which begs the question, if industry experts can be so wrong, why bother? We don't spend any of our time making market forecasts as a result. We are stock-pickers or bottom-up fundamental investors. We prefer to spend our time analyzing individual companies especially those that are under-researched and under-owned by institutional investors. If our portfolio managers and analysts do their jobs, this approach should yield results regardless of the direction of markets. The results of this approach are reflected by the 49-per-cent return of the Nimble Fund and 42 per cent for the Lightwater L/S Fund in contrast to a modest 4.5-per-cent gain in the TSX index and a 17-per-cent drop in the TSX Venture Index over the same period (all % as of 30 November 2013).

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