Market Call: Jerome Hass' outlook on Canadian Stocks

Key Concepts

Market Volatility: Concerns about tech stocks and broader market valuations.
Canadian Mid-Cap Stocks: Focus on undervalued and underfollowed companies.
Valuation Metrics: EV to EBITDA, Price to Earnings (PE), Price to Book.
Sector Analysis: Auto parts, battery technology, industrial services, renewable energy, defense, real estate (REITs), subprime lending, waste management, energy infrastructure, propane distribution, pharmaceuticals, transportation, software, cinema, natural gas storage, logistics.
Company-Specific Risks: Management concerns, trade wars, regulatory scrutiny, short reports, operational challenges, commodity price fluctuations, dividend cuts.
Investment Strategies: Value investing, long-term holding, buying on pullbacks, activist investor influence.
Economic Factors: Tariff wars, widening deficits, slowing growth, recession concerns, demographic shifts.

Market Overview and Investment Strategy

The market has experienced a significant sell-off, which the guest, Jerome Haas, portfolio manager at Lightwater Partners, views as a healthy correction given the high valuations. He notes that the market had risen approximately 20% earlier in the year despite underlying economic concerns like tariff wars, widening deficits, and slowing growth. Haas advises caution due to these elevated valuations, arguing that the upside potential is now limited.

Focus on Canadian Mid-Cap Stocks

Haas highlights Canadian mid-cap stocks as an area offering opportunities due to less investor attention, leading to them being generally undervalued and underfollowed. He emphasizes that while quality tech stocks are scarce in Canada, other market segments within the mid-cap space present effective places to deploy capital.

Company-Specific Analysis and Recommendations

Linamar (Auto Parts & Mobility)

Performance: Surprising rally from April lows, hitting 52-week highs.
Valuation: Trading at approximately 3.5 times EV to EBITDA, considered "phenomenally cheap."
Concerns:
- Auto Sector: Vulnerability to US trade policies and potential renegotiation of NAFTA.
- Mobility Business: Cranes and manufacturing are subject to geopolitical uncertainties.
Recommendation: Extreme caution. Haas would prefer to wait for clarity on trade deals and generally avoids auto stocks. He questions if it's a "value trap."

Elektra-Via (Battery Company)

Performance: Significant run-up from $3.50 to $10.50, followed by a pullback to around $7.
Past Experience: Haas's firm previously held it as a "top pick as a short" with success.
Concerns: Critical of the management team (father-son duo), citing a history of "overpromising and under-delivering" and a "comic track record" of past ventures.
Recommendation: "Tread very carefully." While the stock price has improved, Haas lacks full confidence in the management.

Chemtrade Logistics Income Fund (Industrial Services)

Performance: Has performed well, beating management guidance by approximately 14%.
Tailwinds: Benefited from commodity price movements, which makes Haas nervous due to their potential reversal.
Operational Aspects: Involves various commodity inputs impacting profitability.
Analyst Sentiment: A former sell-side analyst is advocating for a closer look, but a Scotia analyst (Ben Isaacson) recently downgraded it due to its strong year-to-date run.
Recommendation: On the watch list for further examination. Caution is advised due to its recent strong performance and commodity dependence.

Northland Power (Renewable Energy)

Recent News: Dividend cut and guidance issues led to a significant drop.
Past Stance: Not a long-term fan of Northland.
Sector Concerns: Believes there was "too much enthusiasm" for renewable energy companies, leading to overvaluation, particularly among younger investors attracted to "green things."
Recommendation: Cautious on the entire sector. Would not put new money into Northland Power.

Kraken Robotics (Underwater Defense/Robotics)

Ownership: Haas's firm is an owner and has been for several years, with a positive outlook.
Business: Manufactures underwater robotics and drones, primarily batteries.
Defense Angle: Increasing global defense spending, particularly with concerns around NATO and US leadership.
Canadian Sovereignty: Drones offer a lower-cost alternative to submarines for asserting sovereignty in the North.
Growth Drivers:
- US Partner (Drill): In growth mode.
- Australia (White Shark Project): Ongoing collaboration.
- Canadian Government/Military: Potential for investment.
Recommendation: Stick with the investment and buy on pullbacks. Haas loves Kraken and its management team.

Canadian Apartment Properties REIT (CAP REIT) (Rental Housing)

Company Profile: Largest and most liquid apartment REIT in Canada, with approximately 65,000 apartments. A $6 billion company with a ~4% yield.
Market Concerns: Recent reports indicate 13 consecutive months of rent decreases in Canada, which will impact apartment REITs.
Defensive Qualities: Considered one of the most defensive REIT groups.
Strengths: Quality name, Canada still has a shortage of apartment housing, good at capital recycling (selling and buying properties).
Recommendation: A good place to park money, though Haas prefers another name in the apartment space (to be discussed later).

GoEasy (Subprime Lending)

Recent Performance: Very tough 18 months for investors.
Key Events:
- July 2024: CEO Jason Mullen resigned, causing the stock to tumble.
- September 22nd: A short report from a US hedge fund caused a 10% drop, followed by another 5%.
- November 6th: Results announcement led to a 17% decline.
Short Report Concerns: Haas is skeptical of the short report's merits, attributing much of the stock's issues to the growth of its auto financing business. He notes that complicated financial accounting makes it easy to spin a short report.
Subprime Lending: The largest subprime lender in Canada, now a target for American hedge funds similar to Home Capital in the past. This creates "headline risk."
Valuation: Trading at approximately 7 times PE this year and 6 times forward PE, considered "pretty cheap" for a consistently growing company.
Recession Resilience: CEO Jason Mullen's quote: "If you're concerned about a recession, our clients are almost always in a recession all the time. So when a recession comes, they don't really notice it." This suggests less impact from economic slowdowns on their core business.
Recommendation: Holding onto existing positions. At current levels, Haas would be a buyer and happy to hold for the long run, acknowledging the need to manage the stock's weight.

Dye & Durham Limited (Legal Services/Software)

Activist Investor Involvement: Haas generally favors activist investors, believing Canadian management is often complacent.
Past Stance: Never been a big fan of Dye & Durham.
Business Model Concerns: Compares it to Valeant, where they acquired drugs and jacked up prices. Dye & Durham acted as an exclusive supplier to legal firms, buying entities and increasing prices, which lawyers eventually tired of.
Current Situation: Described as a "soap opera" with constant twists and turns.
Recommendation: Not worth the time to look at, especially given a dislike for the business itself.

Superior Plus (Propane Distribution & Logistics)

Original Business: Superior Propane, moving propane and other fuels.
Evolution: Expanded into a logistics business.
Past Performance: Was in the "doghouse" a year ago, trading around $6.
"Superior Delivers" Program: Launched to improve logistics and optimize profitability. The market initially bought into it.
Recent Results: Stock took a big hit due to:
- US Operations: Guidance changed from 10% growth to negative growth (-5%).
- Program Benefits: Not as effective as anticipated.
US Slowdown Impact: Primarily due to a slowdown in supplying oil and gas wells.
Recommendation: An interesting business, but they need to demonstrate delivery. Watching it, but the recent results have brought it back to around the $6 level.

Mainstay Equity (AMEC) (Real Estate - Apartment Owner/Manager)

Past Pick: Recommended on February 21st at $2.78, now at $1.81 (a 9% total return drop).
Business Model: Largest apartment owner and manager in Western Canada (primarily Alberta and Saskatchewan). Not a REIT, but an apartment corporation.
Key Advantage: Not subject to rent controls in Western Canada.
Strategy: Buys "down and out" properties, renovates them, and re-enters the market.
Target Market: Caters to the "mid-market" with average apartment rates around $1,200/month, a segment with high demand.
Growth Story: Phenomenal growth since IPO 25 years ago, with an 18% compounded annual growth rate without raising equity.
Competitive Landscape: REITs and pension funds are not interested in this specific niche, leaving them with a market to themselves.
Recent Performance: Stock has been stagnant due to declining rents across Canada.
Recommendation: Holding on. It's a top three holding. They have significant "dry capital" to deploy.

DR Healthcare Trust (DHT) (Pharmaceutical Royalties)

Business Model: Provides pharmaceutical royalties. Similar to the royalty model in mining (e.g., Franco-Nevada).
Mechanism: Gives upfront money (typically $25-$150 million) to pharmaceutical companies with developed drugs, in exchange for a top-line percentage of the business for the drug's lifespan (average 17-year patent life).
Asset Type: Long-tail assets.
Market Position: One of only four listed companies in North America with this model.
Valuation: Trades at 1.4 times book value, significantly undervalued compared to peers (3.7 times book for listed peers, ~4.8 times for Franco-Nevada). Also trades at 6 times PE and 6 times EV to EBITDA.
Recommendation: Dramatically undervalued relative to peers.

Secure Energy Services (SES) (Waste Management & Energy Infrastructure)

Business Mix:
- 75% Waste Management: Extracts water from oil slurry, industrial landfills, metal recycling, specialty chemicals.
- 25% Energy Infrastructure: Storage, gathering, transportation.
Key Attributes: High recurring earnings, stable cash flows.
Valuation: Trades at approximately 9 times EV to EBITDA, significantly cheaper than waste management peers (average ~17 times EBITDA).
Past Performance: Trimmed a little after reaching $20 earlier in the year.
Recommendation: Likes the name and believes it's very cheap relative to the sector.

Whitecap Resources (Oil & Gas)

Recent Activity: Takeover of a rival partnership.
Market Sentiment: Noise around oil price fluctuations.
Meeting with CEO: Met the CEO in January, described as a "force of nature" and a "colourful guy." Has respect for the company.
Energy Sector Underweight: Canadian actively managed funds are generally underweight in energy (average 6% exposure vs. 18% in TSX). When they do invest, they focus on the "big 3 or 4 names."
Discounted Valuation: Companies like Whitecap, in the tier below the supermajors, trade at a discount.
Recommendation: Believes Whitecap is undervalued and that this will change as more generalists return to the oil and gas patch. Would put money into it for diversification. Dividend yield mentioned as potentially 6.6%, though Haas wants to double-check this.

Pollard Banknote (Lottery & Gaming Solutions)

Past Experience: Haas missed the boat on its run-up and had a negative experience with a similar company, Canadian Banknote, which went bankrupt. This has "tainted" his view.
Business: Similar to Canadian Banknote, involved in the lottery supply business.
Recent Valuation: Recently looked at the valuation and found it "pretty cheap."
Recommendation: May start attracting value investors. Not dug into it deeply yet, but it's on the watch list due to its valuation.

Keyera Corp. (Midstream Energy Infrastructure)

Business: Midstream player, transporting gas and oil from exploration and production companies to pipelines. An infrastructure play.
Volatile Component: Marketing business, which led to a miss in recent results.
Long-Term Chart: Described as a "great story."
Market Opportunity: Energy infrastructure in Canada is a "nice place to play," and more is needed.
Recommendation: A company to watch.

AG Growth International (Grain Storage Equipment)

Recent News: Postponed Q3 results and requested a management cease trading order.
Reason for Delay: Delay in reporting from its Brazilian business is significant enough to prevent Q3 number release.
Market Reaction: Market is not reacting positively to the delay.
Past Investment: Was an early investor ~20 years ago when they were solely in the auger business (equipment for moving grain into silos).
Business Model: Replacement business for farmers, requiring periodic upgrades.
Dependence: Highly dependent on the agricultural cycle, which Haas finds unpredictable long-term.
Recommendation: Moved away from AG names in general. While it was a top idea for some hedge fund managers in August, recent expectations have disappointed the market.

Northwest Healthcare Properties REIT (Healthcare Properties)

Original Business Model: Owned buildings for dentist/doctor offices, pharmacies, and took a cut from pharmacies.
Past Investment: Was an investor at IPO ~15 years ago.
"Lost Their Way": Initially focused on Canada, then expanded overseas, leading to a separately listed international entity that later merged.
Concerns: Haas believes successful mid-cap companies should "do one thing and do it well," not operate both domestically and abroad.
Recommendation: Would not touch it until they exit entirely from foreign operations.

Sienna Senior Living (Senior Care Living)

Sector Concerns: Haas is leery of the senior care sector.
Growth Story: Demographics (boomers downsizing) present a growth story.
Labor Element: Significant concern about the difficulty of staffing these facilities, as highlighted during COVID-19.
Recommendation: Cautious. Has not been impressed overall by the sector.

TFI International (Transportation/Trucking)

Business: Transportation and trucking company.
Valuation Discrepancy: Historically traded at higher multiples than its American trucking peers, which trade at much lower valuations.
"Cult-Like Following": Has a strong investor base that swears by the management team and company.
Past Strategy: Used to short TFI against CargoJet as a hedge.
Recommendation: Not sure he would suggest putting money into it, but acknowledges it has a reputation for good management. Considers it somewhat overvalued or overblown in reputation, but "there's worse places to put your money."

Enghouse Systems (Software Consolidator)

Business Model: Acquires redundant technologies and consolidates them. Businesses are often in declining organic growth sectors.
Concerns:
- Declining Organic Growth: Prefers companies with positive organic growth.
- Single Person Risk: Similar to Constellation Software, has "single person risk."
Recommendation: Has always had an issue with this type of business. Has had small investments in the past but not for the last ten years.

New Top Picks

Cineplex (Cinema Chain)

Long-Term Chart: Not pretty, but was a "stock market darling" from 2008-2015.
Streaming Debate: Disagrees with the notion that streaming services will "eat Cineplex's lunch."
Catalyst: The long-serving CEO, Ellis Jacob, is retiring at the end of 2026. He and other senior managers have change-of-control clauses in their contracts, potentially worth up to $12 million for the CEO if the company is sold.
Sale Timeline: With a 73% market share in Canada, the Competition Bureau will scrutinize any sale. A bid would likely need to occur before the end of June next year to allow for a six-month window for regulatory review.
Risk/Return: Fantastic risk-return over a seven-and-a-half-month window.
Valuation: Valuation remains at $34 (Cineworld's bid in 2009). An activist investor (Windward) believes it's worth $31.
Recommendation: If ever there's a time to buy Cineplex, now is the time, despite its poor long-term performance.

Rockpoint Gas Storage (GSI) (Natural Gas Storage)

Market Position: Largest player in North America, the only listed one. Assets in Alberta and California, with about a third market share in each.
IPO: Recently IPO'd on October 9th. Broker coverage began on Monday.
Play on Natural Gas Demand: Benefits from the growth in demand for natural gas.
Mitigates Price Volatility: Unlike direct natural gas plays subject to price fluctuations, GSI buys gas when prices are negative or very low (e.g., -$0.85 in Alberta) and resells it at higher prices (e.g., $1.15 in February).
Business Model: Stable business with low capex (uses caverns for storage).
Barriers to Entry: High barriers to entry for new competitors.
Beneficiary of LNG: Will benefit as LNG emerges in North America and Canada.
Recommendation: A conservative way to play natural gas growth.

Descartes Systems (DSG) (Logistics Software)

Analogy: "The Bloomberg of trade."
Essential Service: Companies in the logistics business, especially those involved in cross-border trade, need their software and services.
Recurring Revenue: High recurring revenue element (90% of revenues known at the start of each quarter).
Recent Performance: Stock has taken a hit this year due to the tariff war (which ironically increases demand for their services) and a broader sell-off in software stocks (down ~27%).
Valuation: Trading near two-year lows, well below five-year averages. Currently trading at about 22 times EV/EBITDA, which is considered expensive but attractive for a long-term growth story.
Growth: Growing at 7-9% organic growth rates long-term.
Recommendation: An attractive way to get exposure to the tech sector. Believes it's a good time to pick it up.