Category: Weekly Commentary

10 Aug 2017

Issue 32 – On the Canadian Dollar

The exchange value of the Canadian dollar increased in a fast and furious manner in the last few months vis-a-vis the U.S dollar. Since May 4, 2017, the Canadian dollar rose from 72 to 80 US cents a few days ago. That is two cents above our calculated purchasing power parity rate but two cents below its twenty-year average of 82 US cents. At the time of this writing, the loonie was fetching 79 US cents compared to only 68 US cents in January 2016. It appears that the Bank of Canada encouraged the recovery for it sold more than $1.0 billion worth of U.S. dollars in the last six months. Nevertheless, future performance will depend on what will happen to Canadian terms of trade, monetary policy and economic growth.

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03 Aug 2017

Issue 31 – Cineplex (CGX)

The Palos Funds sold their last shares of Cineplex (TSX: CGX) yesterday after the company announced very disappointing second quarter earnings. What is more concerning however, is that the legacy business is under significant stress. Cinema advertising and box office revenue growth was lackluster and quite troubling. The majority of CGX revenue growth came from its acquisitions of TriCorp, Saw, and Dandy, which are amusement businesses. We believe these companies to be more capex intensive and more expensive to run as we expect operating expenses, G&A, and rents to rise considerably.

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27 Jul 2017

Issue 30 – The REIT

Whether interest rates move higher or lower, this REIT will continue to do well. InterRent REIT (TSX: IIP-U) is the best positioned REIT in Canada to fence off any potential rate increases. The reason for its advantageous positioning is that it’s not a traditional REIT where assets are purchased and a minimal amount of maintenance capex is spent. IIP-U is growth-oriented, with the vision of increasing value through acquisition, development, and the refurbishing of legacy assets. This activity allows IIP-U to grow like no other residential REIT in Canada.

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20 Jul 2017

Issue 29 – A Small Cap With a 7% Dividend and Much More

Pivot Technology Solutions Inc. (TSX: PTG) is a small cap dividend payer that is more than just a cash cow. The company has been paying dividends, reducing debt and buying back stock. Not many investors have heard of this company as its market cap is under $100 million. However, this company is expected to generate $1.5 billion USD in revenue and $32M in EBITDA for 2017. The EBITDA margins are currently at 2%, but are expected to expand in the coming years as the company focuses on its managed services. We are expecting managed services to grow from 10% of revenue to 30% in the coming years. Presently, most of the company’s revenue comes from the value-added reseller (VAR) segment. Its VAR business is underpinned by very strong customers, of which approximately 70% are fortune 100 enterprises.

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13 Jul 2017

Issue 28 – Rate Increase

On July 12, 2017, the Bank of Canada (BOC) raised interest rates for the first time in seven years and there is a high probability of a second hike by year-end. The income funds are well-positioned to take advantage of the new interest rate environment. Historically, the materials, industrials, and financials stocks outperformed the broader market under such circumstances.

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06 Jul 2017

Issue 27 – SNC-Lavalin Is Now on Top of The World

On July 3, 2017, SNC-Lavalin Group Inc (TSX: SNC) announced that it successfully completed its acquisition of WS Atkins PLC (Atkins). When combined, the firm will become a global player. The combination will enhance its presence in the rail, transportation, nuclear and energy infrastructure industries all over the world. It will also allow SNC to expand its tentacles into new geographical markets where it is not currently present and create cross-selling opportunities; which should lead to selling and revenue synergies. We are excited as this acquisition starts a new chapter for an old legacy business that needed a bit of a jolt. We are confident that SNC will be able to execute on the synergies as it has a track record of over-delivering on these types of transactions.

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29 Jun 2017

Issue 26 – Take Your Vitamins

If you have never seen this product, I don’t know where you shop. Jamieson Wellness is the leading Canadian vitamin company. Its products are distributed in every major food retailer, drug stores, health food stores and can even be purchased on Amazon. Jamieson’s market share is approximately 2.5 times greater than its largest competitor (Centrum). The company and its brand is clearly the leader in the Canadian vitamin market.

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22 Jun 2017

Issue 25 – The Marriage is Approaching

Potash Corp (TSX:POT) and Agrium (TSX:AGU) announced that the combined company will be called Nutrien. We are expecting the marriage to be finalized in the third quarter of this year. Once combined, Nutrien will be the global leader in reliable, low-cost crop nutrient production, combined with the largest agricultural retail-distribution network in the world. We are not expecting any recovery in fertilizer prices in the short-term. The attraction of the combined company comes from the potential synergies and future free cash flow growth. Even if fertilizer prices are flat, we are expecting free cash flow to grow by 40% in the next 4 years as synergies are achieved. Management has indicated that it expects approximately $450 million of synergies to be created.

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15 Jun 2017

Issue 24 – Energy in The Dog House

Oil prices took a 4% nose dive on Wednesday after the bearish DOE inventory numbers were reported. The bears are definitely in the driver’s seat, and any bad news can ignite an aggressive sell-off in the commodity. The DOE U.S. Crude oil Inventories reported a draw of -1661k and the market was expecting a draw of -2300K. A 4% drop seems a bit aggressive. However, when sentiment is considerably negative, panic selling is not uncommon. A sell-off in the commodity leads to a sell-off in the E&P’s. We are quite selective in picking E&P stocks and ensure that specific criteria is met before inclusion into the funds. Discipline is especially important when there is negative sentiment in the sector and the underlying commodity is under stress.

Charles has been featured in the Growth Story Podcast by David Inzlicht. To listen, go to:

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08 Jun 2017

Issue 23 – Activity in Single Family Rental

The Palos Funds have been investing in US single family rentals (SFR) via Tricon Capital Group (TSX:TCN) for the past few years. On May 9, 2017, TCN completed its acquisition of Silver Bay Realty Trust Corp. The enterprise value of Silver Bay is approximately $1.4 billion. On June 05, 2017, Colony Starwood Homes (CSH) announced that they were buying a portfolio of 3,106 SFR for $815 million. After comparing the two portfolios acquired, we concluded that the TCN portfolio acquired was done at a higher discount. The CSA portfolio acquired has an implied gross yield of approximately 7.5% while that of the TCN portfolio is 9.0%. Our conviction is that the TCN acquisition has been further solidified by the substantial discount it was acquired at.

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01 Jun 2017

Issue 22 – Is the U.S. Economy Heading Towards a Recession?

A serious debate over incoming economic data and the Fed’s future interest rate decisions is brewing. On one side, some economists are warning that with unemployment below current estimates of full employment, additional rate hikes are needed to prevent a costly overshoot of inflation above the Fed’s two percent target. On the other side, economists are arguing that with inflation running below target, additional rate hikes could slow inflation further and restrain the economic expansion. Only time will tell which scenario will become reality. Nevertheless, a dispassionate discussion is warranted. The causal logic is that when the labor market gets tight and broad inflation causes cost pressures to exceed selling prices, the cost of money tends to increase faster than the return on capital, thus leading to profit reduction.

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25 May 2017

Issue 21 – Yes!!! BlackBerry!

Blackberry Ltd. (TSX:BB) is no longer a hardware company. It’s smartphone business is now being licensed and trademarked to companies that want to fabricate smartphones. Blackberry is now fully focusing on software services which can be broken down into 4 segments:

• Enterprise Mobility Management: BB is a leader in providing security systems to all devices that link together. The opportunity for BB in this segment is remarkable because the market is exploding.On average, 10 million new elements are added every day. In 2016, 3.9 billion smartphones and 6.4 billion connected elements were in use. Ericsson mobility believes this will grow to 6.1 billion smartphones and 20.8 billion connected ‘things’ by 2020.

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18 May 2017

Issue 20 – Will Stock Prices Hold?

The old age and the elevated valuation of stock market averages are causing concerns that the bull trend may be nearing its end and that a bad turn is imminent. While we recognize that skittishness can bring about market corrections when valuation metrics are ahead of themselves, secular bear trends are only firmly in place when recession risks are very high. Investors often misjudge what is going on. When the situation is too abstract, people tend to go along with the general consensus as it is socially acceptable and expected of them. These natural herd tendencies are psychological pro-cyclical behaviors that can often go too far, which increases the probability of being wrong.

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11 May 2017

Issue 19 – Hardwood Delivers (Part 2)

A few a weeks ago, we wrote about a company called Hardwoods Distribution Inc (TSX:HWD). HWD is North America’s largest wholesale distributor of architectural grade building products for the residential and industrial construction markets. The reason we have decided to do a follow-up piece on HWD is because it reported eye-popping quarterly results, which were well above ours and the street’s expectations. The company achieved a record revenue, profit, and EBITDA for the first quarter of 2017. We are very pleased with the results. We believe it is very important understand the attribution of the company`s performance. After digging into the financials, the big highlights are:

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04 May 2017

Issue 18 – Savaria Keeps on Buying

Savaria Corporation (TSX:SIS) designs, manufactures, and distributes equipment that facilitates the mobility of people with special needs. More information can be found on their website: The North American demand for this kind of equipment is on the rise. The US and most G7 countries have growing aging populations and they are also seeing increases in disabilities among younger age groups as obesity continues to rise. We believe that SIS is well-positioned to meet the growing demand for mobility equipment. In the United States, one out of every five adults has some kind of disability. The Center for Disease Control and Prevention published a research report stating that the most common functional disability is a mobility limitation. This is defined as having serious difficulty walking or climbing stairs. We believe that SIS is well-positioned to help with this crisis.

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