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(Runtime: 5 min, 32 sec; size: 4.87 MB)
David Picton at Picton Mahoney Asset Management, President and CEO.
We are looking for growth in Canadian equities from companies that can drive their own organic growth without relying as much on the overall economic environment. As we went from some buoyancy as of 2018 into that last quarter sell-off it kind of triggered in our view a belief that we’re in a late-cycle phase. There’s going to be more volatility and there is a significant chance that the U.S. Federal Reserve has made a mistake by tightening too aggressively. So now we’re in a wait and see environment over the next six months into the third or fourth quarter of 2019, before we’re going to be certain as to whether they’ve made a mistake or not.
In that environment, I would expect economic data signals to begin to slow. And as those slow, earnings growth will become a much more scarce commodity. If you can find companies that can grow organically in that environment, I believe the market will treasure them more highly. So a company that we have a lot of interest in at this point in time is called Spin Master. It’s a fairly simple story. These guys are toy makers. They have grown their revenues organically over the last five years at 30% plus clips. They’ve been a tremendous growth story.
They’ve gone through a bit of a pause here as Toys R Us has gone through bankruptcy proceedings in the United States, and it kind of threw the whole toy industry into some turmoil. And as Toys R Us was reducing their inventory and not buying product, other retailers like Walmart or Target or Canadian Tire in Canada or even Amazon were kind of slow to pick up the slack. So there’s been a bit of a dislocation here on a temporary basis, which has created an opportunity to buy Spin Master. Our belief is that this company will now start to see acceleration as we go through 2019. It now trades at a discount to its peers, as opposed to a premium that it deserves.
It has an opportunity to now grow in China with the recent relationship with Alibaba. It’s recently taken DC Comics business away from Mattel. And we think this makes for a really nice interesting re-acceleration story, potentially against the rest of a market that is undergoing some economic related headwinds.
A couple of other stories we like going further out in time, you know, once we get through some slowdown in the economy, once we start to see maybe a re-acceleration of this slowdown, I think you’re going to see that the resource sector starts to play a much more prominent role again. It’s been a number of years since 2011, when we saw a peak in the Chinese demand for raw materials at the same time that we saw a massive build out of new supply come on, and it’s taken years to chew through that new supply and to balance supply and demand forces. Those forces are reasonably well-balanced now.
There is not a lot of excess inventory of some of these commodities like copper, for instance. And there is the potential that we actually run into some under-supply environments whereas demand picks up again, you find that you don’t have enough commodity to supply it. And that would take some years to unwind. We suggest the same thing may happen eventually in the uranium space, you’ll probably see it in the other commodities as well. You may even see it short term in energy related place.
So a couple of names that might fit into that category for us longer term, one would be a company called Champion Iron, an amazing turnaround story. They’re generating a mass of free cash flow yield in this environment and there is a second step-up phase that they’ll likely do in the next economic upturn. It’s a ridiculously undervalued company in our opinion, and once you have the cyclical lined up against it, we think it has a long way to go.
One other name I’d throw out there a little bit more speculative but one that we think plays into a real disruption theme would be Drone Delivery Canada. There is a lot of hope around the world that drones are going to play some kind of solution in that last mile delivery, you know, for instance you get a package literally droned to your house from someone like Amazon down the road. That may or may not occur.
It may not occur in near term, but what is occurring in the near term is that Drone Delivery Canada has been out there in conjunction with the Canadian government, solving problems up in the far north about delivering small packages over short distances. They’ve built out their fleet, but more importantly they’ve gotten a whole aviation license, almost the equivalent of what Air Canada would have. They have a fleet of gentlemen that sit in a room, and women, that kind of monitor drone flights through the air and make any adjustments, should they need to.
So this company now has a revenue stream from the Canadian government to deliver packages between two little communities up north, and that is a massive cost savings to those communities and a massive opportunity as you start to roll that out to other communities. So we think that’s where they start. They already have the infrastructure in place. They’re commercially viable. And then they will start to gain other business that gets closer and closer to the major centres, especially in Canada and then eventually around the world. So a couple of names there that we like in our portfolios.