The Mispriced Markets Portfolio
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.
Jan 1, 2019
In-Depth Analysis: Spotlight On Big Lots
Jan 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.
In-Depth Analysis: Spotlight On Cervus Equipment
Jan 1, 2019
In-Depth Analysis: Spotlight On GoEasy
Jan 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.
In-Depth Analysis: Spotlight On Linamar
Jan 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.
Jan 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.
Jan 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.
PHX Energy Services
Jan 1, 2019
PHX Energy Services is a contract driller with a nicely diversified geographic base. 60% of revenues are coming out of the US right now where the frackers are on fire, along with another 7% or so from Russia. The remainder is back in Canada. PHX has been working on a number of proprietary technologies which could give a strong boost to future growth and profitability if they can drive adoption. To my understanding, these new technologies mostly center around the automation of the drilling process, meaning fewer oil hands needed. With a shortage of skilled oilfield workers and a relentless focus in the industry on cutting expenses to the bone, I could see potentially big demand going forward for these kinds of solutions.
The latest third quarter results were encouraging as the company moved to profitability after a long string of losses. The company is reporting strong demand for its new rigs and continues to invest in new equipment, most recently announcing the establishment of a high-performance drilling motor division. Their balance sheet is strong and they are trading for less than their tangible book value. While the price of oil has taken a deep slide since the third quarter results were released, if they can deliver on the promise of their new drilling systems, they could still turn out to be a big winner.
Preformed Line Products
In-Depth Analysis: Spotlight On Preformed Line Products
Mar 13, 2019
Preformed Line Products is a US based company with global operations. They design, manufacture and sell a wide variety of components used in the construction and maintenance of electrical transmission and telecommunication networks. They stand to benefit from the long-term need to upgrade the aging electrical transmission infrastructure in the US as well as the need for continued energy infrastructure investment in the developing world. Profits took a hit when the energy markets slumped in 2014 and 2015 but have recently recovered and the future looks promising. With a trailing p:e ratio of 11, a strong balance sheet and a somewhat recession resistant end market, the stock appears to offer good value.
Rocky Mountain Dealerships
Jan 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.
In-Depth Analysis: Spotlight On Urban Outfitters
Mar 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.