Bruce Campbell, president and portfolio manager, StoneCastle Investment Management

FOCUS: Canadian stocks

MARKET OUTLOOK:

Is this latest move up in the markets a new uptrend or a bear market bounce?  The indicators that we follow continue to be mixed but are showing improvement. 

Market breadth has been strong with the S&P 500 advance-decline ratio hitting new highs. We recently had a breadth thrust where advancing stocks outnumbered declining stocks by a 1.8:1 ratio on the NYSE over a 10-day period. This has had strong forward returns, but not quite as strong as a 1:2 breadth thrust which we slightly missed in this uptrend. 

We are seeing momentum indicators on an intermediate-term basis turn positive after many months in a negative position. Historically, when we have seen this many indicators on a number of different indices, markets capitalization and geographic regions turn positive it is a new uptrend. The longer-term indicators turning positive will be the confirmation of a new uptrend. This will not be happening for another month or two if it is going to happen. We will continue to monitor the long-term indicators and update investors when we see those long-term indicators make this positive change.  

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TOP PICKS:

Salona Global Medical Devices (SGMD TSXV)

Salona Global is focused on medical devices for the post-operative and recovery markets.  SGMD has been growing organically and via acquisition. The company continues to announce and close acquisition deals. Once closing the announced deals, the company will have a run rate revenue of $85 million and organic growth of 30 per cent. The stock trades at an attractive valuation of fewer than one times revenue and has several potential acquisitions in the pipeline.

Southern Energy (SOU TSXV)

Southern Energy is an energy producer focused on developing and producing conventional natural gas in Mississippi. The company has had early drilling success and with the recent capital raise and can drill between 15 and 20 more wells. The drilling should take the company from the current 3,000 barrels of oil equivalent per day (BEO/D) to 9,400 BEO/D in 2023 and 15,000 BEO/D in 2024. 

Martinrea International (MRE TSX)

Martinrea supplies vehicle components to global automakers. Auto supply chain issues continue to improve and MRE’s business will expand as production of new vehicles continues to catch up to demand. Recently reported financial results exceeded the street’s expectations. The company continues to be awarded new contracts and has maintained guidance for 2023.