TDWhile no longer 6.7%, a 4% holding remains one of the highest for this portfolio. GLTA Canadian Small-cap Model Portfolio
Portfolio Changes
Additions
DRI Healthcare Trust (DHT.UN) at 3.0%
Firan Technology Group Corp. (FTG) at 1.5%
Removal/Reduction
Premium Brands Holdings Corp. (PBH, portfolio weight 2.6%)
Hammond Power Solutions Inc. (HPS.A) to 4.0% from 6.7%
Market Overview
The constructive landscape of disinflation trends, a stronger-than-expected global
economy (ex-China), robust corporate earnings, artificial intelligence, and a positive
market sentiment have allowed markets to march higher over the past year, with
many indices setting or approaching new all-time highs. That said, an increasingly
clouded inflation backdrop with last week's U.S. inflation readings (CPI and PPI)
topping expectations has reduced near-term rate-cut expectations. This is evidenced
by the rise last week in U.S. short-term bond yields to 4.72% from 4.51%. Combined
with rising valuations, high levels of speculation (e.g. Bitcoin), and market technicals
suggesting overbought conditions (exhibits 1 and 2), and we believe that volatility
could increase in the coming weeks. As a result, we are modestly raising our cash
position in our model portfolio with today's changes and continue to maintain an
underweight among the cyclicals (e.g. consumers, base metals, banks).
Stock Screen
With the Q4/23 reporting season now largely behind us, we thought it would be
prudent to re-evaluate earnings momentum among the Canadian small-/mid-caps
by incorporating the latest quarterly results. To do so, we have engineered a screen
where we measure the change in Q4 earnings from this time last year. In our list
of qualifying* names, we have ranked each based on their year-over-year trailing
earnings growth (column C), with the highest positive values at the top. We highlight
our existing portfolio holdings in blue.
Portfolio Additions
DRI Healthcare: Ranked near the top, DRI Healthcare reported Q4/F23 operating
earnings of $1.38 (US$1.02), pacing 160.5% above last year's Q4 results of $0.53
and serves as a significant pickup in earnings momentum (Exhibit 4). Importantly,
market recognition responded favourably, with the shares up 12.8% over the past
month (column A), extending a rally of 39.7% we witnessed over the past three
months (column B).
*We have excluded the majority of groups within the commodity-dependent energy
and materials sectors, as well as the REITs (AFFO-dependent). To minimize outliers
and enhance the reliability of the screen, we have excluded names with low or
negative earnings (i.e. <$0.10). We define small/mid-cap between $100mm-$7bln.
Although not captured by our screen, we acknowledge the positive revisions to earnings estimates following the quarter, leading to a 35.4% increase in 2024 consensus and a 6.5% increase in 2025 consensus over the past three months. This separates DRI Healthcare from top-ranked Canada Goose Holdings Inc. (GOOS) and its declining forward estimate trend. DRI Healthcare generates more than 75% of its revenues in the U.S. — a sought-out attribute for us with our preference for greater U.S. exposure over Canada. Given these positives, we are adding DRI Healthcare, a pharmaceutical royalty company, at 3.0%.
Firan: Another highly ranked name is Firan. Already in an earnings upswing, Firan reported Q4/F23 results of $0.10 last month, a 100% increase over last year. This reflects the robust recovery taking place, with the latest results being the sixth consecutive positive y/y earnings growth quarter. As a result, trailing 12-month earnings have crossed firmly into positive territory from what was a negative position in H2/22. Firan has historically demonstrated a high correlation with its 12-month trailing
earnings (Exhibit 6), which have surged to record-highs, and supports the rally in its share price, in our view. Supporting this earnings growth is Firan’s sales, which have also climbed to all-time highs (Exhibit 7). Like DRI Healthcare, nearly 80% of Firan’s revenues are U.S.-based. A relatively smaller and less-liquid name, we are adding Firan, an aerospace & defense product developer, at a reduced 1.5% portfolio weighting.
Portfolio Removal/Reduction
Premium Brands: Last Friday, Premium Brands reported Q4/F23 results
that came in below expectations, with operating earnings of $0.85 versus
the consensus estimate of $1.09. When measured against last year’s Q4
earnings of $1.19, this represents a y/y decline of 28.6%, moving Premium
Brands near the bottom in our screen. Following the earnings miss,
analysts widely cut their estimates, bringing the 2024 and 2025 consensus
estimates lower by 6.6% and 5.0%, respectively (Exhibit 8). By removing
Premium Brands, we also lower our exposure to the Canadian consumer,
which we believe remains at risk to elevated interest rates to a greater
extent than in the U.S. (higher mortgage debt risk).
Hammond Power: Added to our small-cap portfolio last June, Hammond
has experienced a meteoric rise in both price and earnings. From the mid-
2021 lows, Hammond’s operating earnings have surged 698%, with the
12-month forward consensus EPS estimate rising 479% over the same
period. As an earnings momentum leader over the past few years,
Hammond’s shares have rallied approximately 892% from the 2021
earnings trough. However, with Hammond lapping tough y/y comps,
trailing earnings growth turned negative on Q3/F23 results, marking the
first decline in trailing earnings growth in over two years. Although we do
not expect the high earnings growth rates from the recent past to be
sustainable, we believe that Hammond’s Q3 results could be signalling
slower growth ahead. Hammond is expected to report Q4/F23 results on
March 27. In terms of valuation, Hammond’s 12-month forward P/E has
increased to 20.1x, more than double the 9.4x it was at our June 5 portfolio
addition. With earnings momentum potentially slowing and an expanding
valuation, we are reducing Hammond to 4.0% from 6.7%.