Robert McWhirter is president of Selective Asset Management. His focus is on Canadian and tech stocks.
Catamaran Corp. (CCT-TSX) ($12.5-billion market cap)
Catamaran is the industry's fastest-growing pharmacy benefits manager, helping organizations and the communities they serve take control of prescription drug costs. It is managing more than 350 million prescriptions each year on behalf of over 32 million members. Catamaran processes one in every five prescription claims in the U.S. It produced $587-million of free cash flow in the past 12 months (4.7-per-cent FCF trailing yield). Earnings are forecast to grow 21 per cent and 34 per cent in the coming two quarters. The stock appears to be breaking out of the $40 to $60 band that it has traded in over the past 3 years.
Celestica Inc. (CLS-TSX) ($2.1-billion market cap)
Celestica is cheap at 6.3 times enterprise value to last 4 quarters of EBITDA, .3x ev/sales. The company is also profitable: 13-per-cent ROE forecast for their 2015 calendar year. It has hidden assets: cash of $574-million is 27 per cent of market cap and land at Don Valley Parkway and Eglinton is worth a lot. Massive free cash flow generation: 8 per cent for the most recent 4 quarters: $164-million. It has an attractive stock chart, which looks like it's breaking out.
Sandvine Corp. (SVC-TSX) ($487-million market cap)
Sandvine uses deep packet inspection (DPI) for network policy control solutions to add intelligence to fixed, mobile and converged communications service provider networks to enable services that can increase revenue and reduce network costs. The transition to 100GbE provides an opportunity. 100GbE is faster than the current standards of 10GbE and 40GbE and is starting to get adopted by service providers. Currently, only Allot and Sandvine are shipping products to address this segment. Compared to competing products, however, Sandvine's solution is smaller and more energy efficient.
Sandvine has 19-per-cent forecast ROE, 5.5-per-cent free cash low yield, $162-million cash on hand = 33 per cent of market cap. Sandvine appears cheap: P/E to enterprise value (ev) of 9.4x versus 29-per-cent eps growth forecast and 7.5x ev to forecast cash flow growth of 32 per cent gives an ev to cash flow growth multiple of .24.
Past Picks: January 31, 2014
Alter NRG (NRG TSX) * 4-for-1 consolidator – June 30, 2014
Then: $0.88; Now: $2.64 -23.58%; Total return: -23.58%
FLYHT Aerospace Solutions (FLY TSX-Venture) *Sold early March @ $.54 (break-even)
Then: $0.54; Now: $0.39 +28.70%; Total return: -28.70%
Zecotek Photonics (ZMS TSX-Venture)
Then: $0.90; Now: $0.48 -46.67%; Total return: -46.67%
Total return average: -32.98%
We are cautious on the outlook for Canadian equities in the coming year. Earnings estimates for the S&P/TSX composite index have been cut by 7.5 per cent and 11.2 per cent over the past sixty and ninety days. The forecast p/e multiple of 15.5 x for 2015 for the S&P/TSX composite index appears expensive relative to the modest 3.4-per-cent earnings growth forecast. We believe the sixteen year secular uptrend in commodities has ended and expect further commodity price declines to provide significant headwinds to S&P/TSX composite index in 2015 and beyond.