DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

Every private equity firm will tell you it’s different than all the others but most of them are the same so competition is getting intense. But I recently met the management team of a relatively new PE firmthat actually is different. And after investigating how it stands out, I think they have a shot at gaining market share and making investors a few bucks over the coming years.

Founders Advantage Capital (FCF-T) was created by some of the same people put together Alaris Royalty, which has done very well by investors since its humble beginnings a decade or so ago despite hitting a rough patch recently.

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COVER STORY

FABRICE TAYLOR ON WHY FOUNDERS’

MODEL GIVES IT THE ADVANTAGE OVER ALARIS ROYALTY

CAPITAL IDEAS DIGEST

SMART MONEY: WHY AGITATOR NELSON PELTZ IS BUYING WENDY’S AND

DUMPING MONDELEZ

Mark Bunting Publisher PURE GOLD MINING

IS A TAKEOVER IN THE MAKING AND COULD DOUBLE

Alaris Royalty v. 2.0: Better, Faster, Smarter

AN ANALYST ON THE BIG UPSIDE IN

TIO NETWORKS

Fabrice Taylor Says Founders Advantage Capital is Not Just the Next Alaris — It’s Better “Alaris co-founder

and former senior executive Stephen Reid is the CEO of

FA Capital and Clay Riddell, the oil patch tycoon

and savvy investor who backed Alaris

from its earliest days, is also a ma-

jor backer of the new company.”

Fabrice Taylor

DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

Alaris co-founder and former senior executive Stephen Reid is the CEO of FA Capital and Clay Riddell, the oil patch tycoon and savvy investor who backed Alaris from its earliest days, is also a major backer of the new company.

To understand how FA Capital is different, you first have to understand how traditional pri-vate equity works. Typically, a PE firm will gain control of the target company and pay for much of the purchase price with debt taken on at the company level. Usually the PE firm will want to own a very large percentage of the company if not all of it. PE firms also usually like to not only control the board of directors but also have a lot of say in the running of the business. This isn’t necessarily a bad thing because they can add value.

But here’s the problem, as Mr. Reid explained it to me: the entrepreneurs who built the busi-nesses are often the best people to run them, particularly if they’re still growing at a decent clip. But entrepreneurs don’t like being told what to do, and why would they? Their way cre-ated success.

Plus, many entrepreneurs want to take some money off the table but also maintain a bigger stake in the business than is typically offered by traditional PE.

There are alternatives, such as companies like Alaris, which gives a company (or ultimately its owners) money in exchange for a top-line, usually single-digit royalty. But this creates a problem not for the owners but for the investors.

“Royalty companies end up taking equity risk but not getting equity rewards for it,” Mr. Reid says, meaning that it’s fine to get a small cash flow stream when things are going smoothly but when bad things happen and the royalty payments are cut, the return doesn’t compen-sate for the risk.

Looking at what’s happened with Alaris, it’s hard to argue the point: a couple of the firm’s investments soured, which drove the stock price down about 30 per cent in the past year or so (I think the Alaris team will turn things around.)

It was with all this in mind that Mr. Reid started looking for a new model that would avoid these pitfalls, and he came up with Founders Advantage, whose name hints at the biggest difference.

To illustrate, consider the firm’s largest deal to date, Dominion Lending Centres, a major mortgage brokerage firm.

Founded a decade ago, Dominion has grown to become the dominant competitor in its field with a 40 per cent market share, low debt, it’s economically stable and has very good cash margins. It’s a private equity buyer’s dream.

When co-founder Gary Mauris, a serial entrepreneur with two previous wins under his belt, decided to entertain offers to take some cash off the table, he was approached by a number of firms, including traditional PE, royalty firms, banks and others.

He opted to accept FA Capital’s offer despite the fact that it was lower than others. He de-clined some bidders because they wanted to buy all of the company.

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“It was very smart of them,” says Mr.

Mauris. “If you’re an entrepreneur in

your thirties, forties or early fifties and still have energy

and plans this is the best kind of deal.

These guys [FA] are going to win more

mandates.”

Gary Mauris, CEO, Dominion Lending

“The tax-loss selling looks to be over and now is a

good time to buy. If we’re right on

Founders Advantage Capital, this is not just

the next Alaris. It’s much better.”

Fabrice Taylor

DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

He turned down other offers because he disliked the idea of having outsiders tell him what to do and also because they wanted to slap debt of four to five times EBITDA on Dominion. “It didn’t make sense. They were buying me out with my own money.”

He ended up doing a deal with Mr. Reid who offered to buy 60 per cent of the firm with a majority of the board seats.

But here’s the twist: While Mr. Mauris and his partner own 40 per cent of the firm, they are entitled to earn 70 per cent of any profits above a threshold set at the time the deal was struck, and this is how FA distinguishes itself form the rest of the pack.

The reasons this works is that it gives founders – a small business’ greatest assets - the incentive to keep working hard and grow the business rather than taking their mon-ey and going to the beach.

“It was very smart of them,” says Mr. Mauris. “If you’re an entrepreneur in your thirties, forties or early fifties and still have energy and plans this is the best kind of deal. These guys [FA] are going to win more mandates.”

It should be noted that eventually Dominion will likely be sold and the split on the sale will be 60-40 in favour of FCF. The preferential profit split has nothing to do with proceeds from a sale.

Dominion has been active with acquisitions since doing the deal and Mr. Mauris, who's in his late forties, believes he could double earnings before he’s ready to call it a day. Putting that in perspective, the biggest bid Dominion re-ceived was 12 times EBITDA. If he doubles the earnings and Dominion is sold, FA Capital will triple its investment, not even counting distributions.

And if you doubt that Mr. Mauris believes in the FA model, you shouldn’t. While he and his partner weren’t offered shares as part of the purchase price, they asked for them and are now among the biggest shareholders of the com-pany. That's a very good endorsement.

FA has lots of firepower ($27 million, including $10 of cash, and $17 from an untapped line of credit) and a pipe-line of targets which, if the above logic holds, it has a good chance of winning on favourable terms. The stock has sold off because it hit a high of $6 and the company was slow to deploy capital so tax-losses are kicking in, but management expects to be active soon.

The tax-loss selling looks to be over and now is a good time to buy. If we’re right, this is not just the next Alaris. It’s much better.

The company has announced a dividend policy beginning in March. The first dividend will be small but will grow with acquisitions.

The market cap is $140 million. Desjardins Securities pre-dicts adjusted EBITDA of $22 million next year, so valua-tion is very reasonable.

Finally, this company will be a chronic issuer of shares as it acquires businesses so Bay Street will be promoting the name aggressively over the coming years. Three broker-age firms have initiated coverage on FA with "buy" rec-ommendations and given the pedigree of the people in-volved, we would expect more and bigger firms, even Big Five banks sooner than later, to join the ranks of cheer-leaders.

We think we're getting in early.

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Founders Advantage Capital Corp. - 3 YEAR CHART

DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

Activist billionaire in-vestor Nelson Peltz has been ditching snacks for quick service meals, and the change in his equi-ties diet has been pay-ing off.

According to an article in Barron’s, affiliates of

Trian Fund Management, whose general partner Peltz is a member, sold 3.8 million shares of Mon-delez International (MDLZ-Q) for $167.5 million (U.S.) on the open market on Nov. 1, 2 and 3, based on regulatory filings. The average selling price was $44.09 a share. The stock was trading at around $44.30 on Friday and traded between $35.88 and $46.40 on the Nasdaq over the past 52 weeks.

Meantime, Mr. Peltz, who is chairman of Wendy’s (WEN-Q), has been gobbling up its shares instead. Trian affiliates bought just over 3.7 million Wendy’s shares on the open market on Dec. 2, 5 and 6 for $47.9 million an average price of $12.79. The stock was trading around $13.80 on Friday. It has traded between $8.89 and $14.04 over the past 52 weeks. Mr. Peltz now own about a 23.5% stake in Wendy's and 2.8% stake in Mondelez.

“Nelson Peltz is a highly engaged board member at Mondelez International. Trian continues to be a large shareholder and is very supportive of our plans to enhance shareholder value," a Mondelez spokesman said in an email statement to Barron’s. A Wendy’s spokeswoman declined to comment on the stock purchases.

Trian said the transactions were the result of ad-justments it makes to its portfolio "from time-to-time.”

"Considering that Trian is already by far the largest holder in Wendy’s and that the shares had already surged ahead of the purchases, the additional stock buys look extremely bullish," says Barron's author and managing editor Ed Lin. 

He also notes that Mr. Peltz has been active in Wendy’s for decades, "going back to predecessor companies to the current structure. He has served as chairman and chief executive, and as a director or manager and an officer of Wendy’s subsidiaries from April 1993 through June 2007, when he was named non-executive chairman.

Peltz’s tenure is longer than any of Wendy’s current executives. What other insider knows the company as intimately and would be able to sense more up-side?”

Wendy's raised it dividend in November and re-ported a strong third quarter. Mondelez, meantime, dropped discussion to buy The Hershey Co. (HSY-N) and raised its guidance in October. However, it also warned of a “choppy” global environment with soft emerging market and “North American con-sumers are slowly recovering.”

Barron's reminds investors that Mondelez was criti-cized by president-elect Donald Trump for moving some production of Oreos to Mexico.

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What the smart MONEYIS DOING

DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

Beacon Securities analyst Vahan Ajamian initi-ated coverage of Canopy Growth Corp. (CGC-T) with a “buy” rating and $14.50 price target. Consensus is $13.50. The stock is currently trading around $10.30

“Canada’s medical marijuana industry is already sizeable in itself,” he said in a note. “Once legal-ized, the recreational marijuana market is likely to be many times larger, with forecasts and data from other legal jurisdictions suggesting it could be a $5-billion to $11-billion industry in Canada.

While nothing is ever 100% in politics, our as-sessment of the situation concludes that the Liberal government has both the will and the ability to follow through on this clear election promise – and the ball is already rolling.”

Canadian marijuana stocks jumped last week after a federal task force released its long-awaited recommendations on the legalization of the drug for recreational use.

Mr. Ajamian called Canopy “the clear leader is this industry” and noted it now will control six of the 36 licenses issued by Health Canada to operate in the medical marijuana sector follow-ing its $430-million acquisition of Mettrum Health Corp.

All five analysts that cover the stock have a “buy” rating.

Canaccord Genuity analyst Kevin MacKenzie ini-tiated coverage of Pure Gold Mining Inc. (PGM-V) with a “speculative buy” rating and a price target of 90 cents. Consensus is 98 cents. The stock is currently trading around 46 cents.

Mr. Mackenzie called Pure Gold “a takeover target in the making.” “We rate Pure Gold with a speculative buy rat-ing to reflect both the interim financing risk as-sociated with a non-revenue generating com-pany, as well as the technical risk associated with a project for which final feasibility has yet to be demonstrated,” he said in a note.

All three analysts that cover the stock have a “buy” rating.

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First look — This week’s initiations

DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

Canaccord Genuity analyst Anthony Petrucci initiated coverage of Bonterra Energy Corp. (BNE-T) with a “buy” rating $35 price target. Consensus is $30.50. The stock is trading around $27.50.

He said the company has low costs and sees the potential for “robust” dividend growth.

“Bonterra has been a dividend-paying company since August 2001, with a current annual divi-dend of $1.20 per share. We believe Bonterra has the potential to increase its dividend by near-ly 150% in two years’ time, to $2.90 per share, which should lead to material share price ap-preciation. While we recognize this is a substantial increase, we believe it is more than possible,” he said in a note.

Among 14 analysts that cover the stock, nine have a “buy,” recommendation, four a “hold”

CIBC World Markets analyst Adam Gill initiated coverage of Penn West Petroleum Ltd. (PWT-T) with a “neutral” rating and $2.60 target. Consensus is $2.51. The stock is currently trading around $2.35.Mr. Gill notes Penn West has had to “sell down the majority of its portfolio to right-size the bal-ance sheet and said the company “has made significant progress in its efforts.”

“With the improvements in leverage and a new CEO at the helm, the company can once again focus on creating value rather than preserving what it could. Accordingly, Penn West is target-ing 10% growth from its core plays next year. While we believe Penn West is in a decent posi-tion to deliver on this target, after 20 consecutive quarters of production declines, this growth is very much a ‘show me’ story.”

Among 13 analysts that cover Penn West, four have a “buy,” six a “hold” and three a “sell.”

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DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

Cantor Fitzgerald increased its target on TIO Net-works Corp. (TNC-V) to $4 from $3.50 after it fourth-quarter results were released. Analyst Ralph Garcea maintained his “buy” on the stock. Consen-sus is $3.09. The stock is trading near $2.76.

Under the heading “EBITDA Grit” Mr. Garcea said he believes margins of 16% or more are “achievable on a pro –forma basis.”

“We see TNC pursuing M&A opportunities in both the biller and lending markets,” he added.

All three analysts that cover the stock have a “buy” rating.

Canaccord Genuity analyst Dennis Fong has a “buy” on Enerplus Corp. (ERF-T, ERF-N) and raised his target to $16 from $11. Consensus is $12.71. The stock is currently trading around $12.76.

“You haven’t completely missed it,” he said of the stock, which has risen more than 150% so far this year.

“Enerplus has shown one of the strongest year-to-date share price performances through 2016,” said Mr. Fong. “There is still more upside from its option-ality around natural gas, the higher well density pi-lots at Fort Berthold and continued valuation sup-port.

We recommend that investors with both a short and long-term view should be actively accumulating (and building) positions in the stock.”

The stock was also upgraded to "sector outperform" from "sector perform" by Scotia analyst Patrick Bry-den. His target price $14 from $11. Credit Suisse analyst Jason Frew raised his target by a loonie to $15 with an unchanged "outperform" rating.

Desjardins Securities analyst Kristopher Zack raised his target to $14.50 from $12.50 with a “buy” rating (unchanged).

Among 15 analysts that cover the stock, 11 have a “buy” and four a “hold.”

Desjardins Securities analyst Justin Bouchard up-graded Athabasca Oil Corp.’s (ATH-T) to “buy” from “hold” after its $582-million acquisition of the Canadian thermal oil assets of Statoil ASA, calling it an “excellent” deal. He raised his target price for the stock to $2.50 from $1.75. Consensus is $2.03. The stock is currently trading around $1.84.

“Athabasca has been truly transformed over 2016—the Murphy deal was good, the royalty deals with Burgess were excellent and the deal with Statoil takes it to another level,” said Mr. Bouchard. “The acquisition metrics for the Leismer facility alone work out to $26,000 per barrel per day—which is significantly lower than it would cost to build a brownfield steam assisted gravity drainage (SAGD) facility. When accounting for the approved Corner project, potential Leismer expansion and in-frastructure assets included in the deal, the metrics look even more compelling.”

Among 12 analysts that cover the stock, five have a “buy” recommendation, six a “hold” and one a “sell.”

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What the notable STOCKS

DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

Aurora Cannabis Inc. (ACB-X) is a “speculative buy” at Canaccord Genuity. Analyst Neil Maruoka increased his target price to $3.15 from $2.75. Consensus is $2.75.

Bombardier Inc. (BBD.B-T) was upgraded to “outper-form” from “market perform” by Raymond James analyst Steve Hansen. He raised his target price for the stock to $2.75 from $2.25. Consensus is $2.24.

Canadian Pacific Railway Ltd. (CP-N, CPR-T) was raised to "buy" from "hold" at Stifel by analyst John Larkin. His target rose to $166 (U.S.) from $153. The average is $167.69.

Capital Power Corp. (CPX-T) is an “outperform” over at Raymond James. Analyst David Quezada raised his target price to $27.50 from $24. Consensus is $23.65.

Kinaxis Inc. (KXS-T) was rat-ed a new "buy" at Industrial Alliance by analyst Blair Abernethy with a target of

$68 (Canadian). The average is $72.20.

Taseko Mines Ltd. (TKO-T) was raised to "speculative buy" from "hold" by TD Se-curities analyst Craig Hutchi-son. His target rose to $1.65 from 85 cents. The average is 97 cents.

Teck Resources Inc. (TECK.B-T) was upgraded to “buy” from “hold” by Canaccord Genuity analyst Dalton Baret-to. He raised his target price to $43 from $29. The analyst consensus price target is $32.75.

Lundin Mining Corp. (LUN-T) was raised to “buy” from “hold” by TD Securities ana-lyst Greg Barnes with a target of $9.50, up from $7.50. The average is $8.10.

Essential Energy Services Ltd. (ESN-T) is a “strong buy’ at Raymond James. Analyst Andrew Bradford raised his target to $1.50 (Canadian) from $1.35. Consensus is 86 cents.

Savanna Energy Services Corp.(SVY-T) was upgraded to “market perform” from “underperform” by BMO Nesbitt Burns analyst Michael Mazar. He raised his target price to $2.25 from $1.30. Consensus is $2.55. The company has set up a committee to examine the unsolicited takeover offer from Total Energy Services (TOT).

Surge Energy Inc. (SGY-T) is a “buy” over at Acumen Capital. Analyst Trevor Reynolds increased his target to $4.25 from $4.10. Con-sensus is $3.45.

Chevron Corp. (CVX-N) was raised to "outperform" from "neutral" by Macquarie ana-lyst Iain Reid. His target rose to $130 (U.S.) from $90. Con-sensus is $121.92.

FirstService Corp. (FSV-Q, FSV-T) was upgraded to “outperform” from “market perform” by Raymond James analyst Frederic Bastien. He raised his target price for the stock to $53 (U.S.) from $46

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Other analyst Actions

DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

and selected it as one of his firm’s top picks for 2017. Consensus is $50.25.

Alaris Royalty Corp. (AD-T) was downgraded to “market perform” from “outperform” by Raymond James analyst Michael Overvelde. He main-tained a target price of $23 for the stock. Consensus is $24.46.

Héroux-Devtek Inc.(HRX-T) was downgraded to “market perform” from “outperform” by Raymond James analyst Ben Cherniavsky. His target price fell to $15 from $15.50. Consensus is $17.10.

Hudson's Bay Co. (HBC-T) was downgraded to "market perform" from "outperform" at Cowen by analyst Oliver Chen. His target fell to $16 from $19. The average is $21. Russel Metals Inc. (RUS-T) is a “market perform” at Ray-mond James. Analyst Freder-ic Bastien raised his target to

$25 from $22. Consensus is $23.83.

Sandvine Corp. (SVC-T) was downgraded to "hold" from "buy" at TD Securities by an-alyst Daniel Chan. His target fell to $3 from $4.25. The av-erage is $3.18.

Merus Labs International Inc. (MSL-T) was downgraded to “neutral” from “outper-former” by CIBC World Mar-kets analyst Prakash Gowd. He lowered his target price for the stock to $1.50 from $2.40. Consensus is $2.22.

Valeant Pharmaceuticals In-ternational Inc.(VRX-N, VRX-T) was downgraded to "equal-weight" from "over-weight” by Morgan Stanley analyst David Risinger. Mr. Risinger cut his target price for the stock to $17 (U.S.) from $25. Consensus is $22.91.

Buffalo Wild Wings Inc. (BWLD-Q) was down-graded to "market perform"

from "outperform" by BMO Nesbitt Burns analyst Andrew Strelzik. He lowered his tar-get to $185 (U.S.) from $195. Consensus is $166.13.

General Mills Inc. (GIS-N) was downgraded to “sector perform” from “outperform” by RBC Dominion Securities analyst David Palmer. He dropped his target price to $69 from $73. Consensus is $66.13.

CBS Corp.(CBS-N) was up-graded to “outperform” from “market perform” by BMO Nesbitt Burns analyst Daniel Salmon. He raised his target to $70 from $63. Consensus is $65.46. This after a deal with Viacom fell apart.

Viacom Inc.(VIAB-Q) was downgraded to “underper-form” from “sector perform” by RBC Dominion Securities analyst Steven Cahall. He lowered his target price for the stock to $30 (U.S.) from $44. Consensus is $41.27.

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DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

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Technically SPEAKING by Dwight Galusha

setyourstop.comShaw Communications (SJR.B-T) recently broke out to new 52-week highs. Momen-tum or moving average convergence divergence (MACD) has given a bullish crossover as it bounced off zero which is telling us that momentum remains positive. The RSI continues to trend in its bull market range (40-90). If the SCTR ranking can breakout above 75, this would indicate that SJB is performing better than 75% of all TSX-listed companies.

DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

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Gamehost (GH-T) is breaking out to new 52-week highs on higher than normal vol-ume. The RSI surged above 70 in late October and continues to trend in its bull mar-ket range (40-90). MACD has been very strong since crossing above the zero line in early September. With all indicators trending positive and a SCTR ranking of 80, it is worth taking note of this breakout.

DECEMBER 19, 2016 INVEST LIKE A PRO, WITH THE PROS

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On November 1st, Cameco (CCO-T) made its final low. Since, the MACD and RSI indicators have both surged into bull market territory. Cameco is now breaking out from a bull flag continuation pattern and the SCTR ranking is breaking out above 75. With Relative Strength vs. S&P500 (the green indicator at the top of the chart) out-performing, this should continue to attract institutional investors to the stock.

The CAPITAL IDEAS Digest is published by Capital Ideas Research Inc. The letter does not, and cannot, constitute a recommendation to buy or sell any security. By subscribing, you acknowledge that it is provided for informational purposes only and does not constitute investment advice. You also acknowledge that Capital Ideas may use the subscriber informa-tion to offer additional products and services in accordance with applicable laws. You further agree that Capital Ideas will not be liable for any losses or liabilities that may be occa-sioned as a result of the information or commentary provided in the newsletter. Further disclosures at www.capitalideasresearch.com/disclaimer.php