James Telfser, partner and portfolio manager at Aventine Investment Counsel

FOCUS: North American stocks 

MARKET OUTLOOK:

After a record-setting selloff to start the year, risk markets have found solid footing and have staged an impressive rally. Inflation is front and centre in the minds of investors and we view this as the biggest risk to markets. Risk assets are forward-looking and they are signalling that inflation will slow in the coming quarters. We believe this provides a unique opportunity for long-term equity and debt market investors as we head into the end of 2022.

We continue to hold a higher-than-average cash position but given our long-term focus, we have been active in adding to our highest conviction ideas as they started to price in a deep recession.  

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TOP PICKS:

Celanese (CE NYSE)

A recent addition to our U.S. equity strategy has been Celanese, a global chemical and specialty materials company. It produces engineered polymers that are used in a variety of high-value applications, as well as acetyl products, which are intermediate chemicals used in nearly all major industries. CE is an ideal addition given its industry leadership position, robust free cash flow generation and consistent dividend growth. In terms of valuation, Celanese trades at three standard deviations below its long-term historical average and 10 per cent below its peer group. We believe this dislocation provides an ideal opportunity to capitalize on our multi-year investment thesis. We will see a reduction in business cyclicality, the addition of best-in-class products to CE's offering and numerous revenue and cost base synergies from expanded scale and scope.

WSP Global (WSP TSX)

We have added WSP Global to our client portfolios. WSP provides engineering, project management and environmental consulting services to a variety of end markets worldwide. They have an enviable track record of successful mergers and acquisitions which have helped drive shareholder returns. The acquisition of John Wood Group, as well as their most recent purchase of RPS Group PLC, will solidify their position as a leader in the environmental consulting practice. This will be an important driver of future returns for WSP and it makes up close to 40 per cent of their sales. The current valuation of ~12x EV/EBITDA is attractive considering their history of realizing larger-than-expected synergies from acquisitions.

Park Lawn (PLC TSX)

Park Lawn owns and operates cemetery and funeral home assets across North America. The cemetery industry is highly fragmented, providing opportunities for both organic and inorganic growth. We expect Park Lawn to deploy $75-125 million in capital towards acquisitions over the next 12 months. In the most recent quarter, we saw a normalization of mortality rates. However, we believe investors should focus on the robust pipeline of acquisition targets and favourable demographics. Park Lawn's management team is best-in-class with a well-established track record of expansion and integration. Their balance sheet (1.1x leverage ratio) will continue to provide optionality for years to come.