Market Call

James Telfser's Top Picks: November 24, 2022

James Telfser, partner and portfolio manager, Aventine Investment Counsel

FOCUS: North American stocks 


MARKET OUTLOOK:

While we are encouraged that central banks have begun to soften their language and that we might be past peak hawkishness, what remains to be seen is the damage done to corporate profitability from the previous tightening of financial conditions. Earnings in the third-quarter have mostly surprised positively, yet the bond market is still calling for a significant recession, as the entire yield curve remains inverted. While still heavily underwater, stocks and bonds have begun to inflect positively recently. In addition, gold is looking increasingly attractive as central banks globally purchased a record amount in the third-quarter, a trend which seems set to continue. While we believe the market is likely to continue to see heightened volatility in the near-term, and we are currently holding a higher-than-average cash weighting across portfolios, there are several companies that are performing exceptionally well even in the current uncertain environment. We are selectively adding exposure to both equities and fixed income as we sense that these opportunities could prove to be short-lived.

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TOP PICKS:

James Telfser's Top Picks

James Telfser, partner and portfolio manager at Aventine Investment Counsel, discusses his top picks: Premium Brands, Exchange Income, and Agilent Technologies.

Premium Brands (PBH TSX)

Aventine Core Strategy

We have been long-term shareholders of Premium Brands, a specialty food and distribution company, and continue to believe its management team is one of the top capital allocators in the country. Despite recent challenges with respect to inflation, supply chains and a pandemic, the company continues to report impressive free cash flow per share growth. The valuation of the equity has recently corrected to levels which we believe significantly undervalue the shares, especially considering the consistent growth in earnings and its dividend. We are confident that management will continue to be opportunistic on acquisitions, buy back shares and perform well against its long-term targets. While this will help close the valuation gap, we acknowledge that the current environment is fluid and it may take a few quarters to get back to normalized profitability.  

Exchange Income (EIF TSX)

Aventine Canadian Equity Fund

Exchange Income Corporation is an acquisition-focused company with a concentration in aviation, aerospace, and manufacturing. We have enjoyed piecing together the history of the company under its current leadership and came away quite impressed with its ability to allocate capital and integrate acquisitions. It has completed ~16 acquisitions since 2012 with a total value of north of $1 billion. Exchange Income recently surprised analysts with a significant earnings beat and increased guidance as recent acquisitions and strong operating performance combined to drive strong results. We believe that at current levels investors are undervaluing the earnings power and free cash flow conversion of Exchange Income. Investors will be rewarded through a growing dividend (currently sporting a five per cent yield), continued earnings per share growth and catalysts such as acquisitions. 

Agilent Technologies (A NYSE)

Aventine Dividend Fund

Agilent is a leading analytical measurement company. The company sells instruments, consumables, and services to identify, quantify and analyze molecular properties. The company is a market leader in an oligopolistic industry where the top five participants account for 75 per cent market share. The company has a solid management team who tends to underpromise and overdeliver, a trait we look for in our holdings. The company provides its devices and services to the pharmaceutical, chemical and energy, food, and educational end markets; all of which are growing. Agilent recently reported its fourth-quarter earnings which showed organic revenue growth of 17 per cent and an expansion in operating margin of over 200 basis points, during a tough operating environment. Agilent has minimal debt, has increased its dividend each year since 2012 and has a valuation in line with its peer group.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
Premium Brands (PBH TSX) Y Y Y
Exchange Income (EIF TSX) N N Y
Agilent Technologies (A NYSE) N N Y

 

PAST PICKS: April 20, 2021

James Telfser's Past Picks

James Telfser, partner and portfolio manager at Aventine Investment Counsel, discusses his past picks: Taiwan Semiconductor, Heroux-Devtek, and CCL Industries.

Taiwan Semiconductor (TSM NYSE)

  • Then: $114.95
  • Now: $81.97
  • Return: -29%
  • Total Return: -27%

Heroux-Devtek (HRX TSX)

  • Then: $16.44
  • Now: $13.71
  • Return: -17%
  • Total Return: -17%

CCL Industries (CCL.B TSX)

  • Then: $69.10
  • Now: $63.92
  • Return: -7%
  • Total Return: -5%

Total Return Average: -16%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
TSM NYSE N N N
HRX TSX N N Y
CCL.B TSX N N N