Where to find organic growth

In the late stages of this economic cycle, more investors are looking for safe places to invest.

David Picton, president and CEO at Picton Mahoney Asset Management, says Canadian investors should focus on companies with organic growth. Why? These companies can withstand any economic environment, he said in a Feb. 21 interview.

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“We’re in the late-cycle phase, so there’s going to be more volatility,” said Picton, whose firm is one of three that manages the Renaissance Canadian Growth Fund.

“There’s a significant chance the U.S. Federal Reserve has made a mistake by tightening too aggressively. So now we’re in a wait-and-see environment for the next six months, into the third or fourth quarter of 2019.”

Focusing on organic growth is key. Picton outlined three companies to watch.

• Spin Master Corp.

Toy maker Spin Master has grown its revenues organically over the last five years “at 30%-plus clips,” Picton said.

The Toys ‘R’ Us bankruptcy has caused turmoil in the industry, creating an opportunity for investors to buy Spin Master at a discount. When the toy giant closed its doors in the U.S. last June, Spin Master’s stock was trading at about $58. Its 12-month low was $35.14 on Dec. 21. On Mar. 13, the stock opened at $38.88.

“As Toys “R” Us was reducing their inventory and not buying product, other retailers like Walmart, Target, Canadian Tire in Canada, or even Amazon were slow to pick up the slack,” Picton said. “So there’s been a bit of a dislocation on a temporary basis.”

And with Spin Master’s recent partnership with Alibaba in China, as well as its licensing agreement for DC Comics, Picton predicted the company would see re-acceleration through 2019.

• Champion Iron Ltd.

The resources sector is set to make a comeback, according to Picton.

“It’s been a number of years since 2011, when we saw a peak in the Chinese demand for raw materials,” he said. “At the same time, we saw a massive buildout of new supply. It’s taken years to chew through that supply and balance supply-and-demand forces. Those forces are well balanced now.”

As a result, he said commodities like copper, uranium and iron will be in demand. One company he likes for the longer term is Champion Iron.

The company acquired Bloom Lake mine in Quebec from Cleveland-Cliffs at the bottom of the iron ore cycle in December 2015. It paid $10.5 million, which is just a fraction of the $4.9 billion Cleveland-Cliffs paid for the mine in 2011.

In addition, Picton said Champion Iron is generating massive free cash flow. “And there’s a second step-up phase they’ll likely do in the next economic upturn. It’s a ridiculously undervalued company, and once you have the cyclical lined up against it, we think it has a long way to go.”

Over the last year, shares of Champion Iron have ranged from a low of $0.92 on Dec. 24 to a high of $1.81 earlier this month. On Mar. 13, the stock opened at $1.73.

• Drone Delivery Canada Corp.

Amazon has been testing drone delivery for several years. Consumer package delivery may or may not happen, Picton said, but Drone Delivery Canada is working with the Canadian government to deliver small packages short distances to communities in the Far North.

Picton calls the name “a little bit more speculative but one that we think plays into a real disruption theme.”

Drone Delivery has built out their fleet and secured an aviation licence “almost equivalent of what Air Canada would have,” he said, with teams monitoring drone flights and making adjustments.

As a result of the revenue stream from the Canadian government, the company has solid growth opportunities.

“They’re commercially viable, they will start to gain other business closer to the major centres in Canada [and], eventually, around the world,” he added.

Over the last year, shares of Drone Delivery Canada have ranged from a high of $1.87 on June 18 to a low of $1.12 earlier this month. On Mar. 13, the stock opened at $1.19.

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