VOLUME XXXIV JANUARY 2016

INVESTMENT ISSUES STRATEGIES INSIGHTS FROM DONVILLE KENT

Pendulum
Between 2009 and the middle of 2015, the Capital Ideas Fund, like the broader
equity markets, performed well. However, markets need to reset and these
resets come in the form of corrections. The Toronto Stock Exchange has been
in the midst of a correction since the third quarter of 2014 and that correction
continues into early 2016.

Pessimists and doomsayers, who always sound most compelling at market

bottoms, are usually wrong. The correction we are now experiencing is long in
the tooth and I suspect will ultimately be nowhere near as serious as the one
that took place in 2008/2009. While I do not profess to be a market timer, I
think the preconditions for a significant rally in Canadian stocks are now in
place because both our currency and our stock market are undervalued.

In 2015, the Capital Ideas Fund was up 4.06%1, compared to the S&P/TSX
Total Return Index, which fell 8.32%2 last year. While the start of 2016 has
been challenging, like 2009, I expect the market to perform better as the year
unfolds.

The next bull market

The 2009-2015 bull market is over. Since the Canadian stock market peaked in
September of 2014, Canadian equity indices are down roughly 24%3. This
clearly represents a significant reset, but neither I nor anyone else knows if this
correction is over.

Here is what I do know. I know that oil is trading at a price level that is
unsustainably low. I know that the Canadian Dollar is in the lower third of its
historical trading range and from a purchasing power of parity (PPP)
perspective is quite undervalued. Fair value for the Canadian Dollar is
probably somewhere between USD 0.80 and 0.84. I also know that both
Canadian and international equity investors are significantly underweight the
Canadian market. I read every day about foreign investors who are snapping up
Canadian real estate, from ski chalets to office towers. And I also know that
Canadian growth stocks are very, very attractively priced.

So how attractively priced is the Canadian stock market right now? I regularly
track the forty fastest growing companies in Canada (hereafter referred to as
the Fast 40) and the valuation of these companies by quartile is presented in
Figure 1 below. The cheapest quartile of growth stocks trades at 4.7x 2016
cash earnings and even the second quartile trades on just 8.2x 2016 cash
earnings. Twenty of the forty fastest growth stocks in Canada now trade on
less than 10x 2016 earnings.

Figure 1 - Valuation of Canada's Fast 40

Growth Stocks by Quartile
Quartile 2016 P/Cash Earnings (x)
1 4.7
2 8.2
3 13.4
4 24.3
Source: Donville Kent

The last time I saw valuations this low was back in 2009 when we were
emerging from a far more serious stock market correction. The correction of
2008/2009 was in my view an actual crisis whereas todays correction stems
primarily from concerns related to the slowdown in the global economy. The
collapse of various commodity prices, trouble in China and the slowdown in
emerging markets are all growth problems. October 2008 was about a financial
system that was broken. In 2015/2016, we are dealing with a growth slowdown
that is ultimately linked to global demographics.

The demographic challenges we are facing are extremely well articulated in

Harry S. Dents book The Demographic Cliff I encourage everyone to read it.
Notwithstanding Dents somewhat alarming title, the book carefully points out
how the demographic growth profile of so many countries has peaked in the
last two to three years. If you are familiar with what has happened in Japan
over the past twenty years, now assume that the same phenomenon is hitting
most western countries plus China. A big slowdown in global growth was
inevitable.

Is there really no growth left in the world? Not necessarily, but growth is going
to be a bit harder to find for at least another decade. Economic growth
historically comes from demographics and innovation. Dents analysis
suggests to me that companies that require population growth to grow will
struggle because growth in industries that require population growth will
become a zero-sum game.

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Of course, not all demographic segments are peaking. The demographic
segments that represent people over the age of 55 (in relation to the rest of the
population) are growing rapidly. Thus, even in the context of demographically
based growth, there are growth niches. Demographic growth amongst our
oldest population segments will support companies selling products to seniors
for the next twenty years. However, most other segments of the economy that
are dependent on population growth for profit growth will struggle.

Besides population growth the other source of growth in our economy comes
from innovation. Companies that invent, discover and make new things have
always been an important part of our economy, but there are two reasons why
in the next ten years they will be even more important. First, the market share
of companies that grow because of innovation compared to those that grow
primarily because of population growth will almost certainly increase given the
demographic slowdown. But the second reason is the speed at which
innovation itself is occurring. We live in a world where technology and
innovation allow for the adoption of new gadgets, medicines, services and
technology at an increasingly fast pace. Thus, one can easily argue in 2016
that at the same time that demographic growth is slowing rapidly, innovation
based growth is accelerating.

The phenomenon I describe above is reflected in stock markets all over the
world, and certainly one can see it on the TSX. In Figure 2 below I once again
make reference to the Fast 40 vs the weighting of the TSX 60 index. Here we
see that more than half of the Fast 40 companies are either in technology or
healthcare industries, while only 6% of the TSX 60 consists of companies
operating in those sectors. At the other end of the scale, we see the TSX 60
with a 27% weighting in natural resources while similar stocks represent just a
2.5% weighting in the Fast 40. If you are building a Canadian Growth
portfolio, it will bear little resemblance to the TSX 60.

Figure 2 - Fast 40 Weightings vs TSX 60 Weightings

Sector Fast 40 Weighting TSX 60 Weighting

Technology 32.50% 2.50%

Health care 22.50% 3.60%
Consumer 22.50% 12.30%
Financials 10.00% 39.10%
Industrials 10.00% 15.60%
Resources 2.50% 26.90%
Total 100.00% 100.00%
Source: Donville Kent

Given my outlook for growth in 2016, it is time to turn our attention to specific
companies. Before I do I should point out that I often describe technology and

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health care companies as being in knowledge based industries. Most growth
companies have some kind of technological or knowledge based competitive
advantage that is reflected in both their revenue growth rates and margins, and
this in turn drives consistently high returns on equity. However, many
consumer and financial services companies, which at first glance do not appear
to be a knowledge based business, are in fact highly innovative and extremely
adept at using knowledge to deliver high returns on equity (ROE) for years to
come. I guess what I am saying is that while we want growth, we must be
prepared to find it in less than obvious places.

Finding compounders in 2016

The Capital Ideas Fund invests in companies that are run by ethical and
competent management teams. Typically, we invest in companies that
consistently earn a high ROE without excessive use of leverage. As we look
into 2016, here are the 25 high ROE stocks in Canada with market caps greater
than $500MM that are on our focus list. Note that the Fast 40 companies I refer
to above have market capitalizations of greater than $75MM whereas the
companies I discuss have market capitalizations in excess of $500MM. Thus,
the constituents of the Fast 40 and those represented in the following tables are
not identical but overlap significantly.

Figure 3 - High ROE stocks in Canada - Based on 2016 DKAM estimates

Rank Company Ticker Industry Mkt Cap ($MM) ROAE*

1 Valeant Pharma VRX Pharma 30956 63.1%
2 Spin Master TOY Toys 1958 57.6%
3 Colliers CIG Real estate mgmt 2222 55.7%
4 Constellation Software Inc. CSU Technology/Software 7731 50.9%
5 Cara Operations CAO Restaurants 1330 34.0%
6 Dollarama DOL Retailing 9220 32.2%
7 Clearwater Seafoods CLR Seafood 592 27.2%
8 Kinaxis KXS Technology/Software 1100 27.1%
9 Concordia Health CXR Pharma 1497 23.9%
10 Alimentation Couche-Tard ATD.B Convenience Stores 24365 23.9%
11 Boyd Group BYD.UN Autobody 996 23.3%
12 Enghouse ESL Software 1599 21.3%
13 Canadian Pacific Railway CP Railways 26149 21.3%
14 Exco Technologies XTC Technology/Software 613 21.1%
15 CGI Group GIB.A IT services 16820 20.9%
16 Amaya Gaming AYA Gaming 3156 20.9%
17 Open Text OTC Software 5581 20.7%
18 MTY Foods MTY Food franchising 574 20.6%
19 Linamar LNR Auto parts 3808 20.5%
20 Mitel Networks MNW Network 718 20.1%
21 MacDonald Dettwiler MDA IT/Space/Technology 3104 19.9%
22 CCL Industries CCL.B Packaging 7088 19.5%
23 Home Capital Group HCG Specialty Lender 1826 19.2%
24 Intertape Polymer ITP Tape 986 18.9%
25 Intertain Group IT Gaming 625 18.5%
* Return on average equity, based on cash earnings and adjusted for dividends

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Figure 3 gives us a fairly good look at the 25 high ROE stocks that populate
our database and we would argue that this list of 25 companies on average
represents a very high quality sample of companies listed on the TSX.
However, what Figure 3 does not address is valuation. Our goal is to own high
quality companies that are attractively priced.

Figure 4 - High ROE stocks in Canada - Ranked by 2016 DKAM estimated P/E
Rank Company Ticker Industry Mkt Cap ($MM) P/E
1 Concordia Health CXR Pharma 1497 3.6
2 Intertain Group IT Gaming 625 4.5
3 Home Capital Group HCG Specialty Lender 1826 5.2
4 Amaya Gaming AYA Gaming 3156 5.2
5 Mitel Networks MNW Network 718 5.3
6 Valeant Pharma VRX Pharma 30956 6.5
7 Linamar LNR Auto parts 3808 8.2
8 Exco Technologies XTC Technology/Software 613 10.1
9 CGI Group GIB.A IT services 16820 12.1
10 Open Text OTC Software 5581 12.3
11 MacDonald Dettwiler MDA IT/Space/Technology 3104 12.4
12 Clearwater Seafoods CLR Seafood 592 13.0
13 MTY Foods MTY Food franchising 574 13.3
14 Canadian Pacific Railway CP Railways 26149 14.3
15 Intertape Polymer ITP Tape 986 14.7
16 Cara Operations CAO Restaurants 1330 16.2
17 Spin Master TOY Toys 1958 16.6
18 Constellation Software Inc. CSU Technology/Software 7731 17.9
19 Boyd Group BYD.UN Autobody 996 19.2
20 CCL Industries CCL.B Packaging 7088 20.8
21 Alimentation Couche-Tard ATD.B Convenience Stores 24365 21.4
22 Dollarama DOL Retailing 9220 23.3
23 Enghouse ESL Software 1599 24.5
24 Colliers CIG Real estate mgmt 2222 24.7
25 Kinaxis KXS Technology/Software 1100 59.9

In Figure 4, we show the exact same list as we had in Figure 3, but this time
we rank the list from cheapest to most expensive. For those of you who care to
go back to our past newsletters, it is interesting to note how many companies
have been here before. However, in every case, the stocks that were on last
years list and this years list are now significantly cheaper than they were a
year ago.

In Figure 5 we rank the stocks by a ratio of ROE to P/E. Effectively what this
shows is how many units of growth one buys for a unit of P/E. Thus, Valeant
offers 9.8 units of growth per unit of P/E while Kinaxis offers a half a unit of
growth per unit of P/E. While there are clearly companies in this database that
have questions surrounding future earnings, there are still a number of very
solid companies that offer excellent investment potential.

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 Figure 5 - High ROE stocks in Canada - Ranked by 2016 DKAM Estimated ROAE/PE Ratio

Rank Company Ticker Industry Mkt Cap ($MM) ROAE/PE

1 Valeant Pharma VRX Pharma 30956 9.8
2 Concordia Health CXR Pharma 1497 6.7
3 Intertain Group IT Gaming 625 4.2
4 Amaya Gaming AYA Gaming 3156 4.0
5 Mitel Networks MNW Network 718 3.8
6 Home Capital Group HCG Specialty Lender 1826 3.7
7 Spin Master TOY Toys 1958 3.5
8 Constellation Software Inc. CSU Technology/Software 7731 2.8
9 Linamar LNR Auto parts 3808 2.5
10 Colliers CIG Real estate mgmt 2222 2.3
11 Cara Operations CAO Restaurants 1330 2.1
12 Clearwater Seafoods CLR Seafood 592 2.1
13 Exco Technologies XTC Technology/Software 613 2.1
14 CGI Group GIB.A IT services 16820 1.7
15 Open Text OTC Software 5581 1.7
16 MacDonald Dettwiler MDA IT/Space/Technology 3104 1.6
17 MTY Foods MTY Food franchising 574 1.5
18 Canadian Pacific Railway CP Railways 26149 1.5
19 Dollarama DOL Retailing 9220 1.4
20 Intertape Polymer ITP Tape 986 1.3
21 Boyd Group BYD.UN Autobody 996 1.2
22 Alimentation Couche-Tard ATD.B Convenience Stores 24365 1.1
23 CCL Industries CCL.B Packaging 7088 0.9
24 Enghouse ESL Software 1599 0.9
25 Kinaxis KXS Technology/Software 1100 0.5

Five great stocks for 2016

Concordia Health Care (CXR) Oakville, Ontario based Concordia

Healthcare is a diverse, international pharmaceutical company focused on
legacy products and orphan drugs. Concordia trades on 3.6x 2016 earnings and
below book value per share. Concordias share price has been negatively
impacted by the turmoil facing the global pharma industry over the past year.
Concordia is carrying more debt than we would like, but that debt is being paid
down rapidly and in all other respects Concordia is executing very well on its
strategy. We expect this stock to re-rate significantly in 2016.

Concordia Healthcare (TSX:CXR)

FYE Dec 2013 2014 2015E 2016E 2017E
Revenue ($MM) 40 122 350 1030 1133
Cash Earnings ($MM) 3 23 120 371 420
Cash EPS ($) 0.14 0.78 2.34 7.21 8.16
Net Margin (%) 6% 19% 34% 36% 37%
ROAE 6% 14% 12% 21% 21%
Source: Donville Kent

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Home Capital (HCG) Toronto based Home Capital Group is the largest
independent Mortgage and Trust Company in Canada. The Company has an
excellent track record of managing through real estate slowdowns in part
because it is a low ratio lender. Home Capital trades at 5.2x 2016 earnings and
close to BVPS. Over the past twenty years, Homes actual loan losses on its
mortgage portfolio have been lower than any of Canadas large banks, which
are high-ratio lenders.

Home Capital Group (TSX:HCG)

FYE Dec 2010 2011 2012 2013 2014 2015E 2016E
Revenue ($MM) 309 361 423 481 580 598 640
Cash Earnings ($MM) 181 191 229 264 324 312 325
Cash EPS ($) 2.61 2.75 3.30 3.81 4.62 4.45 4.64
Net Margin (%) 59% 53% 54% 55% 56% 52% 51%
ROAE 27% 25% 26% 25% 25% 20% 18%
Source: Donville Kent

Constellation Software (CSU) Toronto based Constellation Software is a

leading provider of software and services to a select group of public and
private sector markets. We also view the management team as one of the most
astute in corporate Canada. While the stock is not as cheap as it was in 2009,
its multiple is reasonable given the Companys growth rate and the potential
for acquisitions in 2016.

Constellation Software (TSX:CSU)

FYE Dec 2010 2011 2012 2013 2014 2015E 2016E
Revenue ($MM) 634 773 891 1211 1669 1854 2132
Cash Earnings ($MM) 98 159 178 212 276 347 382
Cash EPS ($) 4.62 7.49 8.39 10.02 13.04 16.39 18.01
Net Margin (%) 15% 21% 20% 18% 17% 19% 18%
ROAE 76% 80% 69% 81% 105% 116% 99%
Source: Donville Kent

CGI Group (GIB.A) Montreal based CGI Group is an IT services company

that operates throughout the world. CGI is both reasonably priced and
generates a consistently high ROE. The Company historically makes a major
acquisition every 2-3 years, which it typically borrows to pay for. CGI has now
fully integrated its last acquisition and now has both the balance sheet and
managerial capacity for another acquisition. CGIs reputation as both an
acquirer and operator is superb.

CGI Group Inc. (TSX:GIB.A)

FYE Sep 2010 2011 2012 2013 2014 2015E 2016E
Revenue ($MM) 3732 4224 4772 10085 10500 10287 10674
Cash Earnings ($MM) 486 571 587 650 1038 1184 1313
Cash EPS ($) 1.79 2.19 1.91 2.09 3.32 3.85 4.27
Net Margin (%) 13% 14% 12% 6% 10% 12% 12%
ROAE 22% 25% 20% 17% 23% 21% 20%
Source: Donville Kent

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CRH Medical (CRH) While we dont usually recommend small cap stocks
as part of our January newsletter, we are going to make an exception this year
with CRH Medical. Vancouver based CRH Medical operates throughout North
America, providing physicians with innovative products and services for the
treatment of gastrointestinal diseases. The company has a strong management
team and its operating model is straight forward and easy to understand.
Trading on 8.8x 2016 earnings and with a projected and sustainable ROE of
over 35%, we think the company represents an excellent long-term investment.

CRH Medical Corp. (TSX:CRH)

FYE Dec 2011 2012 2013 2014 2015E 2016E
Revenue ($MM) 5.5 6.8 7.7 12.0 45.3 54.3
Cash Earnings ($MM) 1.2 1.4 2.5 4.1 11.8 20.4
Cash EPS ($) 0.02 0.03 0.05 0.08 0.17 0.29
Net Margin (%) 22% 21% 33% 34% 26% 38%
ROAE 39% 30% 37% 30% 35% 36%
Source: Donville Kent

Final thoughts

Last year was a tough year. Even though we beat the index by more than 12%4,
it didnt feel like a win. Looking into 2016, I sense that we will have better
numbers to report by year end. The pendulum that has taken the Canadian
market and currencies lower feels like it is about to swing back the other way.

I also once again want to thank and compliment my team. Dominika, Chris,
Jesse, Jordan and Ali are hardworking and ethical. They embody the qualities
that I also look for in the management teams of the companies we invest in. I
am a lucky man to be able to work with such fine people and by extension the
investors in Donville Kent are lucky to have such fine people watching out for
us.

Write me if you want to chat J.P. Donville

Jason@donvillekent.com

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 1
Time weighted rates of return for Class A Series 1, net of all fees and expenses as of
December 31, 2015
2
S&P TSX Composite Total Return Index is the Net Total Return version of the S&P/TSX
Composite Index
3
S&P/TSX Composite Index
4
Time weighted rates of return for Class A Series 1, net of all fees and expenses as of
December 31, 2015 compared to S&P TSX Composite Total Return Index is the Net Total
Return version of the S&P/TSX Composite Index

DISCLAIMER

Readers are advised that the material herein should be used solely for informational purposes. Donville Kent
Asset Management Inc. (DKAM) does not purport to tell or suggest which investment securities members or
readers should buy or sell for themselves. Readers should always conduct their own research and due diligence
and obtain professional advice before making any investment decision. DKAM will not be liable for any loss or
damage caused by a reader's reliance on information obtained in any of our newsletters, presentations, special
reports, email correspondence, or on our website. Our readers are solely responsible for their own investment
decisions.

The information contained herein does not constitute a representation by the publisher or a solicitation for the
purchase or sale of securities. Our opinions and analyses are based on sources believed to be reliable and are
written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or
completeness. All information contained in our newsletters, presentations or on our website should be
independently verified with the companies mentioned. The editor and publisher are not responsible for errors or
omissions. Past performance does not guarantee future results. Unit value and investment returns will fluctuate
and there is no assurance that a fund can maintain a specific net asset value. The fund is available to investors
eligible to invest under a prospectus exemption, such as accredited investors. Prospective investors should rely
solely on the Fund's offering documentation, which outlines the risk factors in making a decision to invest.

The S&P/TSX Composite Total Return Index ("the index") is similar to the DKAM Capital Ideas Fund LP ("the
fund") in that both include publicly traded Canadian equities of various market capitalizations across several
industries, and reflect both movements in the stock prices as well as reinvestment of dividend income. However,
there are several differences between the fund and the index, as the fund can invest both long and short, can
utilize leverage, can take concentrated positions in single equities, and may invest in companies that have
smaller market capitalizations then those that are included in the index. In addition, the index does not include
any fees or expenses whereas the fund data presented is net of all fees and expenses. The source of the index
data is S&P/Capital IQ.

DKAM receives no compensation of any kind from any companies that are mentioned in our newsletters or on
our website. Any opinions expressed are subject to change without notice. The DKAM Capital Ideas Fund,
employees, writers, and other related parties may hold positions in the securities that are discussed in our
newsletters, presentations or on our website.

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