Nobilis Health Corp Makes Market Call’s Top Pick

December 15, 2014

Bruce Campbell, president and portfolio manager StoneCastle Investment Management

FOCUS: Canadian Equities

Market Outlook:

Historically the best time of the year to invest is from the last week in October to the start of May (“Buy it when it snows, sell it when it goes”). This is the time frame we are currently in and so far this is working according to history. It is also important to remember two other positive factors when investing – The Presidential Cycle and years ending in 5. The third year of the USA Presidential Cycle has produced the highest rates of return of any year in the four year cycle. We began the third year of the cycle just after the mid-term elections in early November.

We are also heading into 2015. Years ending in 5 are no ordinary years. There is a strong historical bias to the number the year ends in. Years ending in 3 tend to be good years; years ending in 4 are lackluster years, and years ending in 5 are strong years. Looking back at the 9 decades that data for the S&P/TSX is available; years ending in 3 have been positive 88 percent of the time with an average return of 14 percent. Years ending in 4 have been positive 55 percent of the time with an average loss of 1 percent, and years ending in 5 have had a positive return in 9 out of 9 years with an average return of 16 percent. 2015 looks to be exciting if not we will have to wait 10 more years for 2025.

The data on the S&P500 is even longer and shows the same results. Average return for years ending in 3 is 11 percent and positive 75 percent of the time. Years ending in 4 have been positive 60 percent of the time with an average return of 3 percent and year ending in 5 has been positive 100 percent of the time with the average return of 19 percent.

Backing up this data is a positive and growing North American economy. The Leading Economic Indicator (LEI) continues to improve and is comfortably above the 18 month moving average. When the LEI crosses below the 18 month moving average, the odds of a recession increase, this isn’t the case right now.

Energy will be a headwind and tailwind for the economy. It will take more data to see where it will have the most impact. As oil prices drop, it is a huge saving for consumers. It is estimated that with the current drop in gasoline prices it is saving every consumers between $400 and $500 per year. At the same time, the energy business has been a growth industry in North America and a slowdown will hurt GDP. Estimates run from 0.25 percent of annual GDP lost at these prices to as high as 1.25 percent. So watching this data in conjunction with the LEI and yield curve should give us a good warning sign of any possible recession.

Top Picks:

Patient Home Monitoring (PHM.V 2.94%)

Last purchased at $0.55.

Patient Home Monitoring has been growing both by acquisitions and organically. Patient Home Monitoring has very little competition from an acquisition standpoint and has as many as 19 potential acquisitions they are in discussions with in various stages. Management has done a fantastic job of cross selling and driving organic growth in the 20 percent annual range.

Nobilis Health (NHC.TO 5.37%) – Formerly NorthStar Healthcare

Last purchased at $2.38.

Nobilis Health partners with physicians to develop, own and operate ambulatory surgical centers in the U.S. They specialize in providing a superior patient experience with lower healthcare costs. The company has been growing organically and by acquisition. The most recent acquisition was last week when they acquired Athas Health LLC. 2015 EPS estimates in are in the $0.35 to $0.40 range meaning they are trading at less than 7 times 2015 earnings estimates while growth the revenue over 100 percent per year over the last 4 years.

CGI Group (GIBa.TO 0.81%)

Last purchased at $41.72.

The company Canada’s largest technology company and is a global provider of IT and business process services. The company has a 5 year compounded EPS growth of 20%+ and is trading at 13 times 2015 EPS Estimates. This equates to a P/E to Growth (PEG) ratio of 0.65. Catalysts continue to be integrating the recent Logica acquisition and improving the margins. As well further acquisition potential.


Past Picks: January 15, 2014

Air Canada (AC.TO -1.99%)

  • Then: $8.98
  • Now: $11.26
  • Return: +25%.39
  • TR: +25.39%

Aviglion (AVO.TO 0.45%)

We sold Avigilion at $28 in February after it broke down technically in our process.

  • Then: $33.31
  • Now: $16.55
  • Return: -50.32%
  • TR: -50.32%

Tamarack Valley Energy (TVE.V 1.94%

TVE we sold the stock between $5.25 and $5.50. 

  • Then: $4.31
  • Now: $2.84
  • Return: -34.11%
  • TR: -34.11%

Total Return Average: -19.68

Fund Profile

Redwood Equity Growth Fund
The Redwood Equity Growth Fund is ranked #1 by Morningstar in the Canadian Small/Mid Cap Equity Category year to date and over the last 12 months.

Performance as of November 30, 2014

YTD: Fund 22.79%, Index* 8.25%
1 Year: Fund 28.18%, Index* 10.07%
3 Year: Fund 17.90%, Index* 6.51%

* Index: S&P/TSX
* Returns are net of all fees. 3 Year returns are compounded rates of return.

Top 5 Holdings:

InterTape Polymer 3.70%

Patient Home Monitoring 3.67%

Concordia HealthCare 3.67%

Terra Firma Capital 3.67%

Air Canada 3.65%

Twitter: @SC_FUNDS