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StoneCastle's Bruce Campbell

Bruce Campbell is president and portfolio manager of StoneCastle Investment Management. His focus is Canadian equities.

Top Picks:

FairFax Financial Holdings (FFH.TO)

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Last purchase was $639.89.

Fairfax is a holding company comprised of property and casual insurance and reinsurance operating primarily in North America. The company has been posting record underwriting earnings in Canada and the U.S. Fairfax's investment portfolio is well-constructed against global market volatility. The stock trades just above book value and trades at 10 times 2016 earnings estimates.

Algonquin Power and Utilities (AQN.TO)

Last purchase was at $10.30.

The company develops, acquires and owns renewable energy projects as well as traditional utilities like water, electric and natural gas distribution. The company continues to build out a potential portfolio investment projects which have visibility out to 2020. The stock has a 4.5-per-cent yield and as the potential for dividend increases as they build out projects.

Alimentation Couche-Tard (ATDb.TO)

Last purchase was $63.178.

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The company, once only a Canadian company, is now a global operator of convenience stores. The management team has been very strong at making acquisitions, then streamlining and improving the purchased assets to create long term value. The company produces strong cash flow, which builds the financing for the next deal. The stock trades at under 20 times earnings while growing those earnings at 40-per-cent compounded over the last 5 years. Funds own, but none personally or family.

Past Picks: January 14, 2015

Patient Home Monitoring (PHM.V)

Then: $0.83 Now: $0.62 -25.30% Total return: -25.30%

Nobilis Health (NHC.TO)

Then: $4.03 Now: $3.83 -4.96% Total return: -4.96%

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Diversified Royalty (DIV.TO)

Then: $2.69 Now: $2.16 -19.70% Total return: -12.82%

Market outlook:

Starting in July, we began to see a few of the market technical indicators we monitor showing some deterioration and thought it was time to do some lifeboat drills in the event we were headed for a recession and bear market.

Since that time, we have been watching for a confirmed recession in the U.S., which would lead to a bear market. Using cycle analysis and monitoring the U.S. ISM manufacturing data, it looks like the probability for a recession in the U.S. continues to climb. With the ISM at a current reading of 48, this puts the probability of a recession at higher than 75 per cent. If the ISM doesn't improve and drops to the 46 level or lower, that puts the probability of a recession in the U.S. at 100 per cent.

Recessions and bear markets go hand in hand. Once the economy goes into a recession, the probability of an overall bear market is close to 100 per cent. One could argue that the last year has seen bear market conditions in the U.S. and a confirmed bear market here in Canada. If the recession is confirmed, more price deterioration could occur.

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The flip side of this is that sentiment is extremely pessimistic right now. Buyers have disappeared from the markets and analysts, portfolio managers and strategies have an increasingly negative view of the markets for the next year. We all know about China, Europe, the Fed and the slowing economy. Where does the surprise come from? This is what investors now need to watch for, the surprise that no one expects that shows signs of growth. When that happens many of the most oversold sectors like energy and materials will have a huge bounce. Watching the economic and market technical indicators will give you a good indication when the trend is starting to change. You don't need to get the exact bottom because with stocks so beaten down, there will be plenty of upside. Waiting for the trend to be confirmed is safer than jumping in too early.

We continue to be positioned with a large cash allocation in our portfolios. We will monitor our top-down indicators and, when we see improvements, will move from defence to offence with the portfolio and get fully invested.

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