Michael Decter is president and CEO, LDIC Inc. His focus is Canadian large caps.
Top Picks:
Mettrum Health Corp. (MT-X)
Mettrum has 16,000 patients and has established itself as one of, if not the, strongest medicinal players. The company has perhaps the best reputation amongst the physician community. The industry is growing at 10 per cent month over month, and Mettrum is maintaining its market share of 12-15 per cent. The company is fully licensed at two facilities with limitless ability to increase capacity. It is running at 70-per-cent gross margins with cash of over $30-million. The company is well-positioned to participate in the recreational market, which is expected to be rolled out next year.
It has a market cap of $150-million versus Canopy at $460-million, despite Canopy having 2,000 patients and similar operating metrics to Mettrum. Aphria has half the patients and 2x the market cap. A handful of other new entrants with a fraction of the business of MT also trade at a $150-million market cap. This is a massive valuation discrepancy between MT and the other players.
I'm starting to think this space is getting a bit ahead of itself, but Mettrum continues to look like exceptional value and the best way to play the space.
Clearwater Seafoods Inc. (CLR-T)
Clearwater has a virtual monopoly in shellfish in Atlantic Canada. The supply of shellfish is limited as governments look to maintain sustainable fisheries, and because you generally can't farm shellfish. Demand is robust amongst premium end of developed markets and amongst emerging markets, particularly China. Limited supply and strong demand are driving higher prices, which is creating margin expansion for CLR. A recent acquisition in the U.K. diversified the business into new waters and complementary products and is highly synergistic.
EBITDA has gone from $50-million in 2010 to $150-million expected in 2017 under new management, and Clearwater believes they can get to $200-million over the near-term with additional M&A. We expect a very strong back half of 2016.
AGT Food and Ingredients Inc. (AGT-T)
Demand for pulse products is very strong globally from both emerging markets, developed markets and food aid programs. Supply has been all but nil as last year's crop is sold out. This year's harvest is a record breaker and is now being used to meet pent-up demand. Incoming supply and pent-up demand creates strong visibility into the back half of year, and we expect two very strong quarters.
The big crop is also lowering lentil prices, which will allow the company to extract working capital and increase free cash flow to pay down debt. The company has moved into further value-added processing in the Food Ingredient segment by making pulse-based ingredients.
Expect Agrium to penetrate the human food market over the coming months, which will be a further catalyst to margin expansion.
Past Picks: Oct. 22, 2015
Cineplex Entertainment (CGX-T)
Then: $56.00 Now: $50.57 +1.14% Total return: +4.12%
Imax Corp. (IMAX-N)
Then: $37.59 Now: $29.58 -21.32% Total return: -21.32%
Walt Disney Co. (DIS-N)
Then: $113.25 Now: $91.65 -19.08% Total return: -17.97%
Total Return Average: -11.72%
Market outlook:
We expect a better third quarter for the Canadian economy with the resumption of full production from the oil sands and record levels of oil exports by volume. It is too early to feel the effects of the promised infrastructure spending, but it likely to be a meaningful contributor to the Canadian economy in 2017.
We also expect continued growth in U.S. jobs and, probably by December or early 2017, a rate increase by the Federal Reserve. The Bank of Canada is not likely to increase rates in 2016 or 2017. Canada's housing boom (or bubble) has been burst by low oil prices in Alberta and by a new tax in Vancouver, but Toronto housing continues to charge ahead. For how long is a mucky question.
Canada faces a major political challenge in determining whether there is the political will to build any pipelines in the face of determined — although not unified — opposition from environmental and indigenous groups. For a federal government committed to rebuilding infrastructure, it is odd that oil by rail as the default choice would be acceptable.
We are in a lower-for-longer economic environment in terms of economic growth, interest rates and commodity prices. However, we expect a strong finish to 2016 in North American equity markets following the U.S. presidential election.