Jason Donville, president and CEO, Donville Kent Asset Management
FOCUS: Canadian growth stocks
Top Picks: Enterprise Group, VitalHub, MDA Space
MARKET OUTLOOK:
This time last year there were three major forces in your favour. Low valuations, declining interest rates and cash on the sidelines.
2024 turned out to be a great year and many stocks rebounded well and reached new highs. Valuations are now not as cheap as they were, but rates are still set to decline moderately in the U.S. and more so in Canada and the amount of cash in bank accounts and money market funds is still at historic highs. Based on earnings growth, valuations and the direction of interest rates, we expect 2025 to be a good year in the market.
The largest companies that are driving the stock market are growing earnings at roughly twice the market’s long-term rate plus their free cash flow margins are almost three times the historical rate. This type of profitable growth from such large businesses is significant not only because of the cash and value created directly by these companies but the knock-on effects for the thousands of smaller companies involved in this growth in some form.
We’re focused on finding these up-and-coming compounders early. There are many interesting industries in Canada that are seeing accelerating growth like space and defence, healthcare technology and energy technology. Within these pockets of growth, we are still finding high growth, highly profitable companies at fair valuations.
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TOP PICKS:
Enterprise Group (E TSX)
Enterprise Group provides specialized energy site infrastructure and is made up of four business units. Each segment is highly profitable but their growth going forward is driven by their Evolution Power Projects (EPP) business, which was established in 2022. EPP is disrupting how sites are powered by using specific low emission natural gas turbines to displace high polluting and high-cost diesel generators. We recently participated in its capital raise, and we’re excited for them to deploy this capital in 2025.
VitalHub (VHI TSX)
VitalHub provides technology to health and human services providers and its solutions span the categories of Electronic Health Record (EHR), case management, care coordination and optimization, and patient flow and operational visibility solutions. VitalHub has been able to balance high organic growth with consistent and highly accretive acquisition growth. It currently has its best opportunity set for mergers and acquisitions and as a result just raised additional capital plus expanded its credit facility and we’re excited to see them deploy capital in 2025.
MDA Space (MDA TSX)
MDA Space has a long history of space innovation, including the development of the Canadarm. Its three business units are split into geo-intelligence, robotics and space operations and satellite systems. Its large and growing backlog supports significant runway for sustained revenue and earnings growth.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| E TSX | Y | Y | Y |
| VHI TSX | Y | Y | Y |
| MDA TSX | Y | Y | Y |
Past Picks: June 5, 2024
VerticalScope Holdings (FORA TSX)
- Then: $9.95
- Now: $10.93
- Return: 10%
- Total Return: 10%
Propel Holdings (PRL TSX)
- Then: $20.80
- Now: $36.93
- Return: 78%
- Total Return: 79%
Zedcor (ZDC CVE)
- Then: $1.22
- Now: $3.67
- Return: 201%
- Total Return: 201%
Total Return Average: 97%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| FORA TSX | Y | Y | Y |
| PRL TSX | Y | Y | Y |
| ZDC CVE | Y | Y | Y |