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

Jan 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.

 

Big Lots

Current stock price & financial data

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.

 

Cervus Equipment

Current stock price & financial data

In-Depth Analysis: Spotlight On Cervus Equipment

Jan 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.

 

Geodrill

Current stock price & financial data

Jan 1, 2019

Geodrill offers contract drilling services to miners in western Africa. They have been actively trying to diversify their customer base into base metals and potash but most of their business is still with the gold mining industry. They were recovering well from the industry slump of the last few years and appeared to be back in growth mode earlier this year. Then the rug was pulled out from underneath them as Burkina Faso, where they do a large percentage of their business, decided to double its withholding tax rate. These withholding taxes are based on a percentage of revenue and not profit which means that any weakness in operations have an outsized impact on after-tax profitability. This is exactly what transpired in the most recent quarter and it sent the stock price tumbling. I have been attempting to exit this position but am unwilling to simply give the stock away. At the current share price, the company is trading at around 1 times its tangible book value. Management has been guiding to improved results in coming quarters and if they can divert more of their business into lower tax jurisdictions, profitability could improve.

 

Gluskin Sheff

Current stock price & financial data

In-Depth Analysis: Spotlight On Gluskin Sheff

Jan 1, 2019

Gluskin Sheff is one of Canada’s leading independent wealth management firms. They primarily target high net worth individuals and have a long track record of consistent investment outperformance. Over the years they have paid out the majority of their earnings to shareholders in the form of regular and special dividends. Results can be lumpy year to year as they earn sporadic performance bonuses depending on the relative performance of their funds under management. The stock price has been in a deep dive as investors worry about a change in top management and a possible market downturn. Looking out longer-term, though, the low p:e of 8.5 to trailing earnings and the company’s strong long-term track record I believe makes this a worthy addition to the portfolio.

 

GoEasy

Current stock price & financial data

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.

 

Linamar

Current stock price & financial data

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.

 

Magna International

Current stock price & financial data

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.

 

Melcor Developments

Current stock price & financial data

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

Current stock price & financial data

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

Current stock price & financial data

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.

 

Questor Technology

Current stock price & financial data

Jan 1, 2019

An oil and gas services company with a technological twist. Questor rents out a fleet of waste gas incinerator units that it developed itself to oil and gas companies to reduce their methane emissions. They have done extraordinarily well in the past year in Colorado where the state legislature passed tough environmental standard laws mandating the use of technologies like Questor's. They continue to expand their rental fleet and say that other states are now considering adopting similar environmental legislation which would help drive continued growth and expansion.

In a surprising upset to their well-laid plans though, an environmental group managed to get a new initiative onto the ballot for the November 6th elections, proposing what essentially amounted to a ban on all new drilling in the state of Colorado. This proposal was ultimately voted down and the stock price has since partially recovered but it highlights the need for the company to search out expansion opportunities outside the state of Colorado. Recent developments are encouraging in this regard. They are mobilising 10% of their fleet into North Dakota in 2019 and have also been getting enquiries from operators in the Permian basin in Texas. The share price is a reasonable 12 times trailing earnings given the potential for continued growth as environmental standards in other states are toughened and they expand their rental fleet. However, they were heavily reliant on a single customer in 2018 and in 2019, they face the expiration of some of their major patents, so the stock is not without its risks. A recent slide in the price of oil could have additional negative ramifications. It is worth keeping a close eye on future developments.

 

Rocky Mountain Dealerships

Current stock price & financial data

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.

 

Urban Outfitters

Current stock price & financial data

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.

 

WestJet

Current stock price & financial data

Jan 1, 2019

Westjet has big ambitions. They have launched a new, ultra low-cost carrier this year and have been expanding their international flights. They have a long history of profitable growth and strong execution behind them and hopefully this past success will translate into future results as they move into the next phase of their growth. Shorter term, though, they are going through some fairly severe growing pains. They have taken on a bit more debt than I like to see to fuel their expansion plans and this, along with the recent spike in the price of oil and a growing list of competitive threats from other low-cost carriers has put a serious crimp on their profitability. The company lost money in the second quarter of this year for the first time in well over a decade. This has knocked the stuffing out of the stock price and WestJet shares are now trading at a price of only 6 times their peak earnings of a few years ago. A belief in their ability to work through their growing pains and emerge stronger on the other side could pay off handsomely if in fact they do manage to turn their operations around.

 

S&P 500 Put Options

Jan 1, 2019

To help cushion the blow from a major market downturn, I have bought a significant number of put options on the SPY ETF which closely tracks the performance of the S&P 500. These put options have a strike price of 315 (equivalent to 3150 on the S&P 500) and expire Dec 20, 2019. They give me the right, but not the obligation, to sell SPY units at 315 on that date. If SPY is trading significantly below that price on that date I could theoretically buy the SPY units at the existing price and turn around and sell them at 315, making a profit in the process. In practice, however, this is not really feasible as I would need a large chunk of cash set aside to make the initial purchase. So in practice, I would be much more likely to sell the options themselves prior to the exercise date. The options are heavily traded and can be sold at any time. Generally speaking, as the S&P 500 declines in value, the value of the put options should rise, thus hopefully providing some offset to the decline in the value of my long positions in individual stocks.

 

Feb 4, 2019

As the market rallied strongly in January, I used some spare cash to double down on my bearish thesis, buying more put options on the SPY ETF with a strike price of 285 as well as some on the SPX ETF (which also tracks the S&P 500 index) at a strike price of 2850. Both of these new sets of put options expire on Dec 20, 2019. While these additional put options will serve me well if the market succumbs to gravity, they put me in the uncomfortable position of being very likely to lose money if the market continues to climb.