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Portfolio Manager Commentary – September 2018

Horizons Inovestor Canadian Equity ETF (INOC)

The S&P/TSX Total Return Index ended the month of September down 0.89% as the Canadian equity
market was pressured lower on uncertainties surrounding a new trade agreement with the US.
Meanwhile, the Bank of Canada decided to maintain its overnight rate target at 1.5% and adopt a wait
and see approach. The Canadian dollar rose on higher crude oil prices and hawkish comments from
Governor Poloz at the Bank of Canada on a potential rate hike next month. Our Nasdaq Inovestor
Canadian Equity Index (NQICA) fell 1.83% for the same period, 94bps below the benchmark. Our sector allocation contributed -15bps as our decision to overweight discretionary, and underweight health care proved to be detrimental. Our stock selection contributed -79bps as a couple of our stocks clearly underperformed. You will find below the top three and bottom three contributors to performance.

The top three contributors to performance were:

  1. Equitable Group (EQB:CN), a thrifts & mortgage provider, rose 6.4% after origination activity,
    borrowing retention, loan growth all came better than expected in Q2 2018 last month.
  2. Linamar (LNR:CN), an auto part manufacturer, gained 3.7% as investors are optimistic the US
    and Canada will reach a trade agreement that won’t impose auto tariffs on Canadian vehicles.
  3. Couche-Tard (ATD.B:CN), a convenience store operator, increased 3.6% as it posted strong Q1
    2018 results: EPS of $1.15 (beat by $0.09) on Revenues of $19.3B (beat by $1.4B).

The bottom three contributors to performance were:

  1. Canadian Tire (CTC.A:CN), a general merchandise retailer, declined -7.3% after DOL reported
    weaker same-store sales and revised its guidance downward, which is a bad omen for CTC.A.
  2. Norbord (OSB:CN), a wood-based panel maker, dropped -13.8% after CIBC analyst downgraded
    the company’s outlook on lower-than expected building permits in the U.S. housing sector.
  3.  Dollarama (DOL:CN), a chain of dollar store operator, fell -17.6% after disappointing investor
    expectations in its Q2 2018: EPS of $0.43 (miss by $0.01) on Revenues of $868M (miss by $24M).

Best,

The Inovestor Asset Management Team

StockPointer® Canadian Equities Model Portfolio Transactions – October 2018

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Canadian Model Portfolios, which will be effective on October 19th after market close. Here are the details:

 

Ins:

  1. Parkland Fuel Corporation (PKI) – Market Trend. Increase in Energy sector as seen in the Top 100 index therefore increasing our position in the portfolio.
  2. West Fraser Timber Co. Ltd. (WFT) – Intra Sectorial transaction. WFT replaced OSB, whose score fell below minimum.

 

Outs:

  1. Power Financial Corporation (PWF) – Market Trend. Decrease in the Financial sector as seen in the Top 100 index.
  2. Norbord Inc (OSB) – SP Score. OSB score fell below minimum.

 

You can also find the transactions on Inovestor For Advisors, in the Model Portfolios – StockPointer Canada section.

Please contact us for more information.

 

The Inovestor Team

 

It is recommended that you do your own analysis prior to investing in any stock that we suggest. The information contained in this message is provided for informational purposes only and should not be interpreted as investment advice or recommendation to buy or sell any specific securities.

ADR-Large Portfolio Transactions – September 3rd 2018

We have rebalanced the Nasdaq Inovestor Global Index (Link on Nasdaq) based on our US and International Model Portfolios, which will be effective on Septemeber 21st after market close. On July 12th Vina Concha Y Toro was delisted  from the NYSE. Here are the transaction details for the ADR:

Buys:

 

1) Ternium S.A. Sponsored ADR (TX) – Market Trend. Increase in the Materials sector as seen in the Top 100 index therefore we increased our position in the portfolio.

2) Compania Cervecerias Unidas S.A. Sponsored ADR (CCU) – Market Trend. Increase in the Consumer Staplers sector as seen in the Top 100 index therefore we increased our position in the portfolio.

3) Diageo plc Sponsored ADR (DEO) – Stock replacement.  VCO was delisted on July 12th.

4) Allergan pcl (AGN) – Market Trend. Increase in the Health Care sector as seen in the Top 100 index, we increased our position in the portfolio.

 Sells:

1) Golar LNG Partners LP (GMLP) – Market Trend. Decrease in the industrials sector as seen in the Top 100 index.

2) Signet Jewelers Limited (SIG) – Market Trend.  We decreased the number of holdings in Consumer Discretionary sector following index allocation.

3) Infosys Limited Sponsored ADR (INFY) – Market Trend. Decrease in the Information Technology sector as seen in the Top 100 index.

You can find the transactions on Inovestor For Advisors, under the section Model Portfolios – StockPointer US.

 

The Inovestor Team

US-Large Portfolio Transactions – September 3rd 2018

We have rebalanced the Nasdaq Inovestor Global Index (Link on Nasdaq) based on our US and International Model Portfolios, which will be effective on Septemeber 21st after market close. Here are the transaction details:

Buys:

 

1) Hormel Foods Corporation (HRL) – Market Trend. Increase in the consumer staples sector as seen in the Top 100 index therefore we increased our position in the portfolio.

2) Allstate Corporation (ALL) – Market Trend. Increase in the Financials sector as seen in the Top 100 index therefore we increased our position in the portfolio.

3) Eastman Chemical Company (EMN) – Market Trend. Increase in the Materials sector as seen in the Top 100 index, we increased our position in the portfolio.

 Sells:

1) Sherwin-Williams Company (SHW) – Market Trend. Decrease in the industrials sector as seen in the Top 100 index.

2) Pinnacle West Capital Corporation (PNW) – Market Trend.  We decreased the number of holdings in utilities sector following index allocation.

3) Apple Inc. (AAPL) – Market Trend. Decrease in the Information Technology sector as seen in the Top 100 index.

You can find the transactions on Inovestor For Advisors, under the section Model Portfolios – StockPointer US.

 

The Inovestor Team

Canfor Pulp Products (CFX)

In today’s content analysis (Download), we will discuss Canfor Pulp Products, a leading producer and vendor of northern bleached softwood kraft pulp and paper. Canfor operates in two segments: Paper and Pulp, the latter being the main source of revenue for the company. It has been the highest rated Canadian company on our platform for a while and it currently holds an Spscore of 78%.

During the Q2 Earnings release on July 25th, CFX reported impressive results with an earnings surprise of 12.8% ($0.97 versus the market expectation of $0.86). In addition, sales were above expectations as well; $396.4M versus $346.5M leading to a surprise of 14.4%.

EVA Analysis

The company looks great from both a value and growth perspective. Although the stock price has been increasing dramatically (YTD return of 107% and 5-year average return of 32%), it is still trading at a discount of 36% given by the future-growth-value metric. This is due to the fact that the current operating value has been increasing at a quicker rate on average of 46% over the past 5 years and the market believes that the stock price isn’t fully reflecting this growth yet. In addition, NOPAT grew by 31% on average over the past 5 years leading to a current return on capital of 27% which is very impressive.

The economic performance is attractive as well. With a high return on capital and a respectively low cost of capital, the economic performance index is 3.71, hence, the company is generating returns for its shareholders at three times the cost incurred for raising that capital. Furthermore, the overall EVA trend is important when trying to identify if the company has potential to continue growing at the same speed or not, in our case the 5-year trend is positive and at a strong momentum.

Lastly, by glancing over the company balance sheets, the company seems to be quite healthy. This is concluded by rising net income and free-cash-flows, and stable dividend payout and total liabilities.

TFI International (TFII)

 

In today’s content analysis (Download), we will discuss TFI International, a recent buy in the Canadian model portfolio which announced Q2 earnings results yesterday. TFI, is a North American leader in the transport and logistics sector with operations in 4 main segments: Package and Courier, Less-Than-Truckload, Truckload, Logistics and Last Mile. A large contributor to the growth of the company comes from takeovers of smaller trucking companies which later continue to operate as TFI’s subsidiaries.

Q2 2018 Earnings Release

On July 26th, TFI reported EPS of $0.99 (vs. $0.70) leading to an earnings surprise of 41% on revenues of $1.3B (vs. $1.2B). The guidance is positive with fiscal year-end EPS expectations between $3.21-$3.29 vs analyst expectations of $2.94. These results caused the stock price to increase 13% at market open on Friday July 27.

EVA Analysis

The company has had a YTD return of approx. 30% and a current SPscore of 66% which has increased since last quarter. Many factors affect the score, but some of the main ones are the net operating profit after tax (NOPAT) which increased by 17.38% per year on average and the rising return on capital which currently stands at 13.6%. Furthermore, invested capital has been decreasing YOY since 2016 and the NOPAT was increasing over this period, hence, leading to improved performance that was shown in the rising economic performance index from 0.98 (in 2016) to a current ratio of 1.73.

Further analysis of the company’s balance sheets reflects a decrease in Free Cashflow (FCF). FCF gives us a sense of how much cash is left over after the company pays its expenses. The cash left is used for paying dividends and pursing projects that can add-value to the shareholders. In the case of TFI, the fall in FCF is largely due to the $294M of debt paid.

The improved performance gives TFI a spot in the top 5 companies in the Canadian Industrials sector. Furthermore, as seen in the EVA executive summary, the stock is doing well given by the EVA trend and is undervalued by both the P/IV and FGV metrics. This fact implies a great opportunity and great time for entry.

Canadian Model Portfolio Transactions – July 2018

Sells: 

– Sun Life (SLF)  – SPscore. We sold SLF:CN because on a relative basis IAG:CN is a better stock to own in the portfolio.

– Enghouse Systems (ENGH)  – Market Trend. Reduction in the info tech sector. We had to remove a position in the portfolio. 

Buys:

Industrielle Alliance (IAG)  – SPScore. We purchased IAG:CN to replace SLF:CN in the financials sector.

TFI International (TFII) – Market Trend. Increase of the industrials sector. We had to add a position in the portfolio.