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Stock Opinions by Gajan Kulasingam

N/A

Markets. The 1st quarter has been very volatile. There have been a fairly number of days where the market has been up 1%, down 1%, and he kind of expected that coming in. Any time you have the Fed move away from a policy that they have had for the last 5 years, you are going to have some dislocation of asset prices. Economic growth has not come in as strong as people had hoped. The rising US$ continues to hurt earnings for the multinationals. Energy prices continue to be low, hurting some of the S&P energy names. Market would like more certainty so that valuations can be recalibrated on a different rate path.

Unknown
N/A

Industrials. A postsecondary recovery has a normal cycle recovery of 5-6 years and we are already beyond that, and we haven’t gone through a full cycle yet. Transportation still has potential room for value. Short cycle industrials, depending on the end market exposure, have potential value. However, we are past the early cycle and are somewhere between the mid-to late cycle. You want to look at businesses that give you exposure to mid-cycle exposure, preferably non-residential.

Unknown
N/A

Utilities. He would be cautious. They had a great January and pulled back in February and March, essentially taking all of that back. Still thinks valuations are somewhat risky going into a rising rate environment and would look for specific utilities that are going to give you above average growth, M&A optionality and which have multiple leverage for value creation, either through asset monetization or through dividend growth and buybacks.

Unknown
HOLD

One of the more unique businesses within his portfolios. Their business strategy is to buy undervalued assets that are sometimes in trouble. They like to recapitalize it, restructure it, grow the business and then sell it and recycle the capital. A very difficult business model to replicate. The 5% distribution model is solid. It has been tough for them to do deals, which is why the stock has held back a little. Recently went into France and expanded into a tower telecom. He is comfortable holding this, but wouldn’t be adding to it.

Energy Infrastructure, Industrials & Utilities
COMMENT

A bit of a tough story in the near term. Balance sheet is a little bit levered up and they need to de-lever it. They spun out Transalta Renewables (RNW-T) which unlocked some value. Have a significant amount of assets that they need to drop-down into Transalta Renewables. They’ll take that cash back and de-lever the balance sheet. He thinks they are committed to maintaining an investment grade balance sheet. It is going to take some time for them to work through this cycle, so you are going to have to be patient.

electrical / electronic
COMMENT

A much more high-quality business than Transalta (TA-T). Has fully contracted assets. A very yield oriented asset and with the constructed cash flow stream, that makes the dividend very stable. If you want a very stable, income oriented investment, this would be the better of the 2.

Energy Infrastructure, Industrials & Utilities
N/A

What is the correlation between oil prices and share prices of pipeline companies? There is a fairly high correlation. Today’s oil price does not directly impact today’s cash flow stream, but what does impact is the price of oil over the long term. If oil stays at $30 for 3 years, then the growth and volume going through the pipelines will slow down and start to impair the valuation. The actual commodity spot price should not have a direct valuation.

Unknown
COMMENT

This is essentially an Alberta-based power generator. Within the utility space, this has the most upside exposure and downside risk to Alberta Power prices. Management has done a good job of diversifying away from Alberta, and it generates a significant amount of free cash flow. Over the next 2 years, he thinks it can generate roughly $300 million of free cash flow. If you are looking for a business that gives you merchant power exposure to Alberta at depressed power prices this is interesting, but you have to be cognizant that you are taking on a fair amount of volatility and risk.

electrical utilities
HOLD

One of the largest dominated water infrastructure businesses in North America, in both clean and waste water. They continue to win contracts with municipal regions. Have gone through a refinancing, which has allowed them to free up cash flow allowing them to raise their dividend. Solid management. Phenomenal track record of generating stable dividend growth. At these levels he wouldn’t be adding to holdings.

electrical utilities
DON'T BUY

Fortis (FTS-T) or Emera (EMA-T)? The real difference between these 2 is that one is Western Canada and the other is eastern Canada. He doesn’t own either. They’re both trading at around 19-20 times earnings, which is a little rich going into a potentially rising rate environment. Between the 2 is preference would be towards Emera.

electrical utilities
COMMENT

Fortis (FTS-T) or Emera (EMA-T)? The real difference between these 2 is that one is Western Canada and the other is Eastern Canada. He doesn’t own either. They’re both trading at around 19-20 times earnings, which is a little rich going into a potentially rising rate environment. Between the 2 his preference would be towards this. It has an interesting side in that it is exposed to capacity markets in the Northeast, which just increased their capacity payments significantly higher than what people were expecting, which was a boost to this company’s earnings.

mngmnt / diversified
PAST TOP PICK

(A Top Pick July 15/14. Up 4.18%.) Acquiring Time Warner Cable (TWC-N). They are looking at the landscape and realizing that it is changing. Within the framework of the incumbent cable and telecom, he feels this is in the best condition to navigate that change in the landscape.

Cable
PAST TOP PICK

(A Top Pick July 15/14. Up 8.95%.) A multi-industrial with exposure to medical devices and your typical businesses as well. In this market, this is one of the better industrials to own, because it doesn’t have exposure to oil and gas. The new CEO has done a great job of navigating shareholders expectations. Feels they have a significant amount of CapX to do a deal. It is an M&A story, and people are waiting for the M&A to happen.

machinery
PAST TOP PICK

(A Top Pick July 15/14. Down 18.2%.) An energy services provider, the largest construction contractor for oil pipeline construction in North America, as well as the transmission distribution business. A phenomenal company. Management has done a great job. They continue to navigate this market and haven’t really lost any contracts. Valuation is very cheap at about 11X earnings. When energy prices recover, this company will have significant upside.

misc industrial products
DON'T BUY

This owns and operates several different power generation assets including hydro, thermal, wind and renewable. Has quite a high dividend yield of about 8.5%. Payout ratio on an AFFO basis is about 100%, which will stay there till about 2017 until 80 MW of assets comes on line. He generally does not like to own businesses with a high payout ratio, but he thinks they can manage this. They have Bristol Waters in the UK, which is a regulated business. It was recently given a tariff pricing, and Capstone rejected this because it was too low. This is a bit of a risk. He doesn’t like businesses that have a high payout and low visibility on growth and a leveraged that he is generally not comfortable with.

management / diversified
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