Portfolio Holdings

The Mispriced Markets Portfolio
Company information

Following is a brief description of each of my portfolio holdings along with an explanation of why I think the stock offers enough value to justify taking up a spot in my portfolio. Please take note of the date for each notation in the list below as recent market and company-specific events can change the outlook for a stock significantly. Before taking my opinions at face value, it would be well worth checking to see if more recent news may have changed the company outlook. To that end, I have included a link to the Morningstar website for a more up to date summary for each of my portfolio holdings.

For some of the stocks in my portfolio, I have written up a more detailed analysis. Typically this is written at the time of the initial purchase or recommendation of the stock. If there is an in-depth analysis available, I will include a link to it. Once again, make note of the date the report was written. Circumstances may well have changed in the interim.

Assure Holdings

Current stock price & financial data

January 1, 2019

Assure Holdings is a company based out of Colorado that managed to find its way onto the Canadian exchanges. The company offers neuro-monitoring services to surgeons. If the surgeon starts to cut into a nerve during an operation, the technologists running Assure's machines can alert the doctor before irreparable harm is done. The company is reporting strong earnings and has exciting growth potential as it pursues expansion into states outside their home turf in Colorado. 2018 was a difficult year as the founder of the company used the company credit card a little too liberally for his own personal expenses. Trading was halted for five months as new auditors and new management were brought in. The company appears to be back on track, with exciting growth potential as they continue to roll out their services into new states and new surgical applications. Lingering doubts remain about the ability of the company to fully collect on its billings, but recent results have been encouraging in this regard. Even assuming that a significant proportion of billings will ultimately be uncollectable, the strong growth prospects and the low valuation make this a compelling story.

 

June 9, 2019

Assure finally came clean with the release of their year end results this winter. They admitted that they will not be collecting on as much of their billings as they had hoped to. While their ultimate collections fell short of their aspirations, they were enough to still produce a very respectable degree of profit. Q1 results confirmed the level of collections reported at year end and annualizing these results gives EPS of almost 16 cents for the full year. At the current share price of $1.73, that in turn gives a p:e of only a little over 10 for a company that, by all accounts is set to grow rapidly as it expands its operations into additional states and increases the number of cases it performs in each of its current markets. The company has had more than its share of difficulties over the past 12 months but this may be giving current investors a chance to get in on the ground floor of an attractive growth story at a still very reasonable price.

 

Big Lots

Current stock price & financial data

In-Depth Analysis: Spotlight On Big Lots

January 1, 2019

Big Lots has over 1400 stores spread across the United States, selling a variety of goods from furniture to food and consumables to seasonal products. They specialise in closeout and discount merchandise. For the past 10 years, their strategy has been to keep their store footprint stable and recycle any excess profits they have into buying back their shares on the public market. As a result, even though sales and earnings have stayed relatively flat on an absolute basis, their per share numbers have shown healthy growth.

Results this year have disappointed, though, as they have fallen prey to the “retail apocalypse” that has been sweeping the sector. However, they remain solidly profitable and as a down-market retailer, my hope is that they might exhibit some resiliency if we are headed for a recession, as they did during the last economic downturn. At the current price of $27.10, the stock is trading at a very reasonable 8 times my reduced earnings expectations for this year of $3.50.

 

June 9, 2019

While earnings continued to slide in the first quarter of 2019, there are some encouraging developments happening under the hood at this company. They are moving forward on an aggressive remodeling and renovation of their existing store network. They have already updated almost a third of their store base and aim to have completed the refurbishment of most of their network by the end of 2021. These remodeled stores are seeing strong sales gains, positive reactions from customers and are piquing the interest of both suppliers and landlords who are more interested in doing business with this rejuvenated concept. Comparable store sales have been positive for the past 4 consecutive quarters, the company is growing its e-commerce sales and its loyalty rewards program and is launching new product lines, new e-commerce initiatives and continuing with the rollout of its new “store of the future” concept. The company is projecting adjusted EPS of $3.75 for 2019 which gives the stock a p:e of 7.2 at the current $27 share price. The market is expressing skepticism that the company can successfully complete its transformation but I think this skepticism may prove to be unwarranted.

 

Bird Construction

Current stock price & financial data

June 9, 2019

Bird is a construction company based out of western Canada. When the resource sector was booming, Bird was booming as well. Sales were climbing, profits were robust and the dividends flowed like wine. But then the bloom came off the rose and Bird fell on hard times. They were making $1 per share or more during the resource boom but these earnings have dried up over the last few years. They lost money in 2018 and lost money again in the first quarter of 2019. However, they have been actively diversifying their client base, looking for business to replace the lost oil and gas and mining business. They have secured a contract to build 9 new Ontario Provincial Police detachments and 20 new light rail transit stations in Ottawa. Meanwhile, the resource industry still offers up the occasional goody like their recent contract to build workforce accommodation for the new LNG plant in Kitimat. They had some problems with the execution of a major contract last year and at the beginning of this year which took a big bite out of their profits but they think that their results will improve as the year progresses and they are targeting a return to “normalised” EPS of around 59 c by next year. This company has always struck me as quite well run. Their balance sheet is rock solid with no net debt and they have a history of paying out virtually all of their excess earnings in dividends. My belief is that they have a future with or without a return of the resource sector and at the current share price of $5.74, I can buy in to this story for a little less than 10 times their projected earnings. If they manage to hit those projections, I think this will be a good buy.

 

Cervus Equipment

Current stock price & financial data

In-Depth Analysis: Spotlight On Cervus Equipment

January 1, 2019

Cervus operates a chain of farm equipment dealerships spread across western Canada. They also own a similar chain in Australia and New Zealand. Additionally, they operate a trucking division in Ontario which sells Peterbilt trucks. A binge of farm equipment buying in the early 2010's led to a hangover that lasted several years and dragged down sales and profitability in the sector. Conditions seem to be returning to normal again, though and the company is back in growth mode. 2018 saw near record-high profits on the back of strong equipment demand in both the agricultural and trucking sectors. With a trailing p:e of 8.5 at the current share price of $12.75, this stock looks to me to offer good value in an otherwise expensive market.

 

June 9, 2019

The recovery in the farm equipment and trucking sectors may prove to be short-lived. Results came in on the weak side in Q1 and inventory started to pile up on their dealer’s lots. With the Chinese embargo on canola and a trucking sector that seems to be rapidly cooling off after last year’s torrid rise, 2019 could be a difficult year for Cervus. However, when taking a longer-term view and averaging out the results of the last four years which has included both good times and bad, the stock is still trading at a reasonable p:e of 11 or so to those average earnings at the current share price of $12.11.

 

Essential Energy Services

Current stock price & financial data

In-Depth Analysis: Spotlight On Essential Energy Services

June 20, 2019

Essential owns and operates one of Canada’s largest fleets of coiled tubing rigs, used to drill long-reach horizontal and vertical wells for the oil and gas industry. They also have a downhole tool rental business which offers up a variety of equipment to the drilling industry.

Essential is mostly dependent on activity in the western Canadian basin which has been hammered not only by the severe decline in the price of oil in 2014 but also by a crushing lack of takeaway capacity that has caused the price of Canadian oil and gas to plunge to a fraction of the US benchmark price. This has brought activity in the sector to a virtual standstill and everyone in the industry is feeling the pain. Most service companies are losing money and are facing a very uncertain future if drilling does not pick up.

In this harsh environment, Essential has been holding its own. The company has been essentially breakeven over the last two years. It’s debt appears to be well in hand, especially compared to many of its competitors in the industry. At the current, severely depressed level of operations, the company looks like it could survive almost indefinitely. And looking out at the far side of the valley, the stock is trading at only one third of tangible book value. If the price of oil were to rise in the future, if the Trans Mountain Pipeline expansion moves forward, if additional railcar capacity is brought online or if the new LNG plant being built in Kitimat drives a renewed burst of activity in the sector then this company could prosper once again. A return to the pre-bust return on equity levels of over 10% would mean potential EPS of 10 cents or more. At the recent share price of 31 cents, that seems to offer a very large potential reward to offset the significant risk that activity will never fully recover in the Canadian oil patch.

 

GoEasy

Current stock price & financial data

In-Depth Analysis: Spotlight On GoEasy

January 1, 2019

This is what Peter Lynch would call a GARP stock. (Growth at a Reasonable Price) By my calculations the stock is trading at a p:e of around 10 to earnings that have doubled in the past 3 years. They started out life operating a chain of rent-to-own stores that would rent out TVs, sofas, appliances, etc. to customers who didn't want to purchase the goods outright. In running this business, they saw a need among their customers for credit that wasn't being met by the big banks. They saw a window to position themselves between the somewhat predatory payday loan stores and the disinterested, larger banks and to this end, they have been aggressively rolling out their Easy Financial network over the last few years. Revenues and earnings have been soaring and the company still sees room for plenty of growth. They are expanding their network into the province of Quebec, they are adding new customers to their existing outlets and they are adding new products to their growing suite of financial services.

The stock was hit this fall by a short seller’s report that raised concerns about the possibility of new legislation that might regulate the fees and interest rates that they can charge as well as concerns over the quality of their loan book and whether or not they are provisioning properly for loan losses. While these are certainly legitimate concerns, the valuation is low enough and the outlook is sufficiently appealing that I remain fully invested.

 

June 9, 2019

The company reported a very strong first quarter with earnings up 65% over last year on the back of a 22% increase in revenue. They continue to grow their loan book as they reach out to new customers and reported their 36th consecutive quarter of same store sales growth. As the company grows its loan book, the losses it has to book on its admittedly high-risk portfolio grow as well. Their bad debt expense, as a percent of their overall revenue, has been creeping up, but still appears to be quite manageable. Something to watch but not something that has yet to scare me away from owning this high-growth play in the financial sector. Based on their strong showing in Q1, I am pegging EPS to come in at over $5 in 2019 which gives the stock a compelling p:e ratio of just under 10 at the recent $50 share price.

 

Linamar

Current stock price & financial data

In-Depth Analysis: Spotlight On Linamar

January 1, 2019

Linamar is a $5 billion, large cap company with a spectacular track record of growth. EPS have grown by a factor of 4 since their previous peak at the end of the last business cycle in 2007. Currently trading at a p:e of only 5 to trailing earnings, this stock looks very cheap on the surface, especially considering its size and track record. However, investors are justifiably nervous about the auto sector in general. Car companies have been aggressively pushing out longer term loans and consumers may find themselves tapped out soon enough. Auto sales at the big car makers are starting to slide. The resolution of the NAFTA negotiations still leaves some unanswered questions. And the electric car bogeyman is out there on the horizon, threatening to put an end to the internal combustion engine. But all that nervousness has created a good buying opportunity, I believe. Linamar is actively positioning itself to win business in the emerging, electric car industry and they are also diversifying into other sectors. They already have a very successful division that manufactures scissor lifts. To this, they recently added a large acquisition in the farming equipment space. 50% of their profits now come from outside the automotive sector. With these moves, my hope is that there is plenty of opportunity for Linamar to continue to thrive and grow in the coming years.

 

June 9, 2019

Looked at in the rearview mirror, there is nothing not to like about this company. Q1 earnings showed a bit of a decline from the record level of earnings they put up in the same period last year but on a trailing 12 month basis, the company is still making over $8 per share in profit giving it an almost ludicrously low p:e ratio of 5 at the current share price of $44. Sales were higher in the quarter, driven by strong content per vehicle growth, strong sales growth in their aerial platform segment and the inclusion of their new farming equipment division. But the market is not looking backwards, it is looking forwards and it does not like what it sees. The future is getting cloudier by the day as the economy slows and threats of new tariffs ripple across the automotive landscape. I am still optimistic that the market’s substantial fears will prove to at least be partly unfounded.

 

Magna International

Current stock price & financial data

January 1, 2019

Magna is one of the biggest bruisers in the Canadian market, with a market cap of $20 billion and operations spread across the globe. They have factories in China, Europe, the US, Mexico and Canada making a wide variety of auto parts for a wide cross section of automakers. The metrics look good with a trailing p:e of 7 and debt that is only 2 times earnings, but investors just aren't interested. Valuations are low across the industry. Like Linamar, Magna sees lots of potential in the evolving electric car space. With auto makers committed to launching dozens of new electric models over the next few years, Magna is sure to win a chunk of this new business as it did when it won the contract to build the new iPace for Jaguar. As well, they have been actively pouring money and resources into developing autonomous driving systems and if you can believe the string of news releases, have been making strong headway in this exciting new area.

They had a record year in 2017 to cap off an impressive 4 year run with returns on equity well into the 20% range and earnings continued to reach new heights in 2018. Profit margins have also been impressively high. Compared to their performance during the last business cycle, they are really firing on all cylinders.

While this is great news, it is also merely what we see in the rearview mirror. Looking out the front windshield, the road ahead does not look so clear. There have been reports of sliding auto sales in the news recently and investors are taking a very dim view of the whole auto industry. An investment in this company could require a deal of patience as we may have to whether a severe downturn before things perk up again, but at the current share price, I am willing to wait out the worst of the storm.

 

June 9, 2019

Earnings in Q1 2019 were down from the record level they reached last year. It appears as if the long-awaited downturn in the automotive sector is finally upon us. But will it be as bad as the wipe-out that nearly bankrupted the industry in 2008? Or will it be a kinder, gentler slowdown? Investors appear to be betting on the former with this stock (recent share price - $59.43 CDN) now trading at a p:e ratio of around 6.5 times last year’s peak earnings. Clearly, I’m taking the other side of this bet.

 

Melcor Developments

Current stock price & financial data

January 1, 2019

Melcor is a property developer based out of Calgary. They got side-swiped by the downturn in the oil patch and the stock still has not recovered. You can pick it up now for half the net value of their property holdings (a lot of which is raw land that they are holding to develop). They have been solidly profitable for the past 16 years (which is as far back as I've looked) and have been in the business for decades. Their business model is to buy up undeveloped acreage, put in the roads, sewers and whatnot and then sell completed lots off to builders. They typically keep some of the prime land to develop into big box plazas and then keep some of the resulting retail and office space and stuff it into their pet REIT or hang on to it themselves and harvest the rental income. The Canadian housing market may be a bubble looking for a pin but Calgary, at least, doesn't have the million dollar crack shacks that Vancouver does. These guys have been around the block quite a few times so I am okay with backing this horse despite the risk of a housing bust 2.0.

 

June 9, 2019

Nothing dramatic to report on in Q1. Profits at this company tend to be quite lumpy as the timing of their various development projects impacts the distribution of their earnings over the course of the year. My adjusted trailing 12 month EPS figure is currently sitting at $1.60 giving an attractive p:e ratio of 8.3 to the stock which traded recently at the $13.25 mark. But really, it is the book value that I am basing my investment on and at a price to tangible book value of 0.4, this stock still looks like a good addition to my portfolio.

 

Rocky Mountain Dealerships

Current stock price & financial data

January 1, 2019

Rocky Mountain owns and operates a chain of farm equipment dealerships in western Canada. This industry has apparently been through a dry spell over the last few years. Sales and earnings slumped at RME and there was some excess inventory that they had to work through. But things are back on track now. Inventory levels are down and profits are picking up. Hopefully, this momentum will continue. Historically this has been a strong performer through all the phases of the business cycle as their results are affected more by weather patterns than by economic activity. People can put off buying the latest iGadget but they are always going to want food on their plates come suppertime. Right now, that sort of more defensive play is looking attractive. And at a trailing p:e of 9 and a p:b of 1, you don’t seem to be paying a significant premium for this sort of stability.

 

June 9, 2019

This was supposed to be a defensive play. A safe harbor in a stormy sea. It may not be turning out that way. Q1 was a big disappointment as the company posted its first quarterly loss in the 10 years that I have records for. The stock price has responded in kind, swooning significantly from the peak levels it reached last year. Farmers weren’t buying in the quarter and inventory levels surged. The Chinese canola embargo is weighing on sentiment and crop prices may be affected in unpredictable ways by the adverse weather conditions south of the border and Trump’s trade war. I am basing my continued investment in this company on its strong past history of robust profitability. If we use the average EPS of the last 4 years we get a p:e ratio just under 10 at the current share price of $8.68. What’s more, the p:b ratio has dropped down below 1 with the recent slide in the share price. Those numbers are enough to keep my invested in this company and hoping for sunnier skies down the road.

 

Urban Outfitters

Current stock price & financial data

In-Depth Analysis: Spotlight On Urban Outfitters

March 15, 2019

Urban Outfitters is a leading apparel retailer, operating under 3 different banners: Urban Outfitters, Anthropologie and Free People. They operate a network of more than 600 stores spread across the US and Canada and are currently growing their footprint in Europe. With their blend of apparel, accessories and "apartment wares" they appeal to a broad spectrum of young adults. Like many retailers they have been struggling to meet the rising challenge of online competition and a saturated retail marketplace. They have been more successful at this than many of their peers and have made impressive strides in building out their "omnichannel" strategy, reaching customers where and how they want to be reached. Profits were down in fiscal 2018 on the back of higher costs associated with developing their online delivery capabilities but have rebounded impressively in the year ended Jan 31, 2019. Their outlook is a little guarded going into 2020 but at the current price of $28.61, the company offers investors a trailing p:e ratio of 10.4 which looks like a good value for a profitable, well-run retailer with a strong balance sheet and room to grow.

 

June 9, 2019

Like many companies in the retail sector, Urban Outfitters had a challenging time in the first quarter of 2019. Earnings were down modestly from last year which admittedly, was a very strong year and offered up a tough comparison. Comparable store sales were down in their physical stores while online comparable sales grew by double digits. They had some fashion misses in the first quarter and will have to increase markdown activity in Q2 to clear some of this inventory. Their guidance is for an even weaker Q2 to follow in the footsteps of Q1’s somewhat disappointing results. This certainly calls for a sober second look at the stock’s valuation. If the negative momentum of the first half of this year carries through to the year as a whole, then EPS could perhaps slide to $2 or even less this year from the record $2.72 they earned last year.

But the company’s balance sheet is rock solid with no net debt and a few dollars of cash per share in the bank. They have a long history of profitable growth behind them and have been doing impressively well with their online operations. They have room to expand in Europe and recently announced the launch of a new subscription-based, clothing rental offering designed to resonate with the millennial’s interest in the sharing economy.

So while the short term looks less appealing than it did last year, I think the current share price of $23 offers a still attractive risk/reward profile with a p:e of 11 to my reduced near-term earnings expectations.