Canadian equities roundtable: Part 3

Shopping for bargains in consumer stocks

Sonita Horvitch 5 May, 2012 | 12:30AM
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Editor's note: Coverage of our Canadian equities roundtable concludes today with the trio of value managers weighing in on insurers and other non-bank financials, consumer-related stocks and industrials.

Our three panellists:

 Daniel Bubis, president and chief investment officer and founder of Winnipeg-based Tetrem Capital Management Ltd., which manages money for institutional and high-net-worth clients. Bubis manages a range of mutual funds for CI Investments Inc., including CI Canadian Investment   and CI Canadian Investment Corporate Class.

 Mark Thomson, managing director and head of research at Beutel, Goodman & Co. Ltd. Thomson and his team manage a range of mandates including Beutel Goodman Canadian Equity  Beutel Goodman Canadian Dividend   and Beutel Goodman Canadian Balanced  .

 Ian Hardacre, vice-president and head of Canadian equities at Invesco Canada Ltd. His mandates include the lead manager role in Trimark CanadianTrimark Select Balanced.

The three-part series, which began on Monday, was written by Morningstar columnist Sonita Horvitch, who moderated the discussion.

Q: We have discussed the big five Canadian banks. What of the Canadian insurers?

Hardacre: We own Manulife Financial Corp. MFC. It is the only insurance weighting in the portfolio.

Thomson: We own it.

Bubis: So do we.

Hardacre: We like Manulife's underlying businesses. The negative issues are behind it. Its skeletons are out of the closet. If you look at where the stock price is and given the potential for a higher interest-rate environment, the company is attractively valued. The risk/return is favourable. Manulife will do better on the earnings front, but it is important to note that its earnings-growth potential is nowhere near where it was, before its problems. Manulife is hedging its equity exposure.

Bubis: It is taking less risk. Arguably, Manulife's return on equity was juiced back then; it bet on the equity market. Now it is hedging this exposure.

Hardacre: I did not own Manulife for a long time after it demutualized. Financial institutions are essentially in the commodity business, offering similar services. Manulife was growing at double the rate of the industry. We were concerned that something was not right.

Daniel Bubis and Ian Hardacre

Thomson: Manulife's franchises are strong in Canada, the United States and Asia. There is potential for good to excellent returns.

Bubis: Unlike some of the stable dividend-paying companies that we were talking about at the outset, this stock has a lot of upside in a rising interest-rate environment.

Q: What about the other Canadian insurers?

Bubis: We own Power Corp. POW, which consists mostly of Great-West Lifeco GWO and some IGM Financial Inc. IGM.

Thomson: Power Corp. is predominantly Great-West Lifeco. Beutel Goodman is a major shareholder in Great-West Life. We like the company a lot. It has a strong franchise and is a good allocator of capital over time. Its business generates high returns on equity and a lot of capital. The stock has a dividend yield of more than 5% and it is trading at a low multiple.

Q: Other non-bank financials?

Hardacre: Brookfield Asset Management Inc. BAM.A. It is mainly exposed to infrastructure assets and commercial real estate. It is no longer a huge position in the portfolio. It is now about a 2% weight.

Mark Thomson

Q: Canadian consumer-related stocks? They represent slightly more than 7% of the S&P/TSX Composite Index.

Thomson: We like Canadian Tire Corp. Ltd. CTC.A, Shoppers Drug Mart Corp. SC and Metro Inc. MRU. They are all strong free-cash-flow generators and have significantly increased their dividends over the last five years. They are well run from a shareholder's perspective. Shoppers faced heavy government intervention in drug pricing. Still, its market share has consistently increased. There are concerns that Canadian Tire and Metro are facing increased competition. We think that both companies can weather this storm.

Bubis: I own Shoppers and Empire Co. Ltd EMP.A. I don't love the grocers; they have some huge competitive challenges, but Empire is the cheapest of them. In the consumer-discretionary sector, we own auto-parts makers Magna International Inc. MG and Linamar Corp. LNR.

Thomson: We have a big weighting in Magna.

Bubis: Magna is super cheap. It is a premier auto-parts company globally. It is a little out of favour, because it has some European exposure. It trades at a huge discount to U.S. auto-parts companies, but Magna is arguably a better company.

Hardacre: In Canadian consumer staples, we own Alimentation Couche-Tard Inc. ATD.B. It just announced a large acquisition. (Statoil Fuel & Retail ASA, a leading Scandinavian convenience and fuel retailer.) We have owned Couche-Tard since it made the Circle K acquisition. We helped finance that acquisition. It is one of the largest convenience-store operators in the world. It is a difficult business. Senior management owns a lot of stock and runs the company with a long-term focus. Its latest acquisition takes it to Europe, so there is some risk. But it is buying a well-established company.

A consumer-discretionary stock in the portfolio is Thomson Reuters Corp. TRI. It is our largest holding in the fund.

Thomson: I own it.

Bubis: So do I.

Stock YTD 1Yr 3Yr 5Yr 10Yr
Alimentation Couche-Tard Inc. 35.4 73,5 49.3 13.0 18.3
Canadian Tire Corp. 5.8 16.5 12.6 -0.5 9.4
Empire Co. Ltd. -0.9 9.9 6.7 7.8 8.3
Metro Inc 1.3 19.4 15.2 8.2 11.6
Shoppers Drug Mart Corp. 4.1 5.8 1.7 -1.5 8.5
For periods ended April 30, 2012. Total returns include price appreciation plus reinvested dividends.
Source: Morningstar

Hardacre: The risk/return is favourable. It has a 4% dividend yield. There is no risk to its dividend. The stock is where it is because Thomson Reuters has mismanaged its markets division, which has underperformed. The company is repairing itself. But there are great barriers to entry in its existing businesses. It is a strong free-cash-flow generator. The stock is the cheapest it has been in a long time.

Bubis: It is historically cheap. We have a big position in the stock. We have been adding to it. This company will keep increasing its dividend. It has opportunities in emerging economies.

Thomson: Its management and its board have been disappointing. They have destroyed a lot of shareholder value in the past five years. They have also increased the underlying volatility of the business. But the company still has some positive characteristics and the valuation is fine.

Q: Industrial stocks? They constitute 6% of the S&P/TSX Composite Index.

Hardacre: We have owned Toromont Industries Ltd. TIH for a long time. It is our largest industrial holding. It is more of a small-cap. It has similar characteristics to Couche-Tard. Management has a big equity interest in Toromont and manages the business for the long term. The company produces high returns on equity through the business cycle. It owns Caterpillar dealerships in Ontario, Manitoba and Newfoundland. It has a good list of potential contracts. It's not the cheapest stock, but we're fine with that. Management has an excellent track record.

Thomson: We have large holdings in the rails. We own Canadian National Railway Co. CNR and Canadian Pacific Railway Ltd. CP.

Bubis: We own CN.

Thomson: They are good businesses over time. CN has been well run. It has generated a lot of capital and has returned a lot of that to shareholders. Its operational side is exceptional. The stock is not cheap. It is a decent holding.

CP has obviously run up in the wake of the shareholder activism. This railroad has not been managed in an optimum manner. There is significant potential going forward. Even though the stock may look fully valued based on current results, we think that the results could improve over the next couple of years. But the Canadian rails are not a cheap group any more.

Bubis: The U.S. rails are cheaper than the Canadian ones and there are some near-term growth drivers for the U.S. rails.


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Sonita Horvitch

Sonita Horvitch  

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