Monday, January 28, 2013

4 'Special Situation' Canadian Stock Picks

Disclosure: I own MRD and CMG

WestJet Airlines (WJA-T)- WestJet is the best-in-class airline in Canada. Their balance sheet is exceptional for any company, much less an airline. They have a long term debt to equity of .42 and 1.45 billion in cash. That's almost half the market cap in cash. The nature of the airline industry is very cyclical so I would be cautious at these levels, but we can learn a lot from WestJet about how a best-in-class company almost always outperforms. Their main competition, Air Canada, is bogged down in legacy and pension costs, hampering their ability to effectively compete. WestJet continues to execute on their strategy of being an efficient and well-run company. Airlines are generally shunned by investors, but the numbers don’t lie with WestJet. Personally, I wouldn't think twice to buy on any type of pull back even at these extended levels, but you’ll want to keep a close eye on earnings calls for any cyclical slowdowns.

Cineplex (CGX-T)- Cineplex has a dominate position in movie theaters  essentially a monopoly. Their only competition is from Empire Company who also operates a small chain of movie theatres. Movies are ingrained in our society, and I still believe Cineplex will thrive even with the internet and downloading movies becoming more prominent. Cineplex makes most of their money on high markup confectionery items, which hints at a pricing advantage. With the lack of significant competition and a proven management team, I expect Cineplex to continue to outperform the broader index over time.

Melcor Developments (MRD-T)- There have been several negative headlines the last 6 months regarding the housing industry in Canada. As a result, the valuation of Melcor Developments has been depressed, still trading at 5.5 times earnings and .92 book value. Considering the recent company performance, which has been great, there is a clear disconnect between the valuation and the performance of the business. I think Melcor will be a great pick for 2013 because it should appreciate by a combination of multiple expansion and earnings performance. They recently announced plans to unlock value by spinning off some assets into a REIT – the result is a more focused community developer with more capital. I’m willing to bet housing is in a correction, not a free fall, and Melcor is the cheapest way to play with still some room for serious growth long term.

Computer Modelling Group (CMG-T)- CMG occupies a terrific niche in oil services technology; they make reservoir simulation software for the oil and gas industry. They have a tremendous record of un-interrupted double digit earnings growth over the last 10 years, usually growing over 20% a year. Over the long term, they have rewarded their shareholders handsomely with a combination of dividend growth, special dividends and capital appreciation. They have a world class balance sheet with no long term debt and lots of cash. A decent argument can be made that CMG is expensive, trading at 28 times forward earnings, but I believe it’s worth the premium. There is almost no other company that has consistently performed better over the long term than CMG, yet it still remains under followed and underappreciated.

32 comments:

  1. Flew back east with AC in the new year and of coarse they lost our bags on the way back. I'm not selling my WJA shares anytime soon.

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  2. Love to own CGX and CMG, both great companies. But the P/E ratio is just a little too high for my liking.

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  3. I would love to get my hands on some CGX, people love going to the movies!

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  4. I know some avid movie goers and regarless of economy they go once or twice a week. Plus families, teenagers and dating etc. CGX is here to stay. I could envision them eventually making foreign acquisitions, following a similar growth strategy to alimentation couche-tard.

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  5. Solium Capital (SUM) up 13.4% today and 43.4% YTD. A top pick for Robert McWhirter today on Market Call.

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  6. The latest edition of the ROE Reporter by Jason Donville is a great read for the do-it-yourself investor.

    http://www.donvillekent.com/roe-reporter.php

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  7. The Donville/BNN Effect

    Jason Donville was on Market Call Tonight yesterday and his top picks were RFC(14.05%), SO(5.48%), & BAD(2.35%), all up today. Investor enthusiasm was so high at the open for Rifco IIROC halted trading pending news but Rifco stated it was unaware of material change that would impact the company. He also talked up HLF(2.73%) & PLB(2.96%).

    The last time he was on the same thing happened. If I could only figure out a way to get him on more often I would do alright this year.

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    1. Still lots of negativity out there. Climbing the wall of worry. Scaring the retail investor. Lots of this bull to play out... http://business.financialpost.com/2013/02/08/canadas-economy-sheds-21900-in-first-drop-in-6-months/

      Nice move in RFC since you bought in. Saw that Donville said RFC doesn't deal with subprime.. more C-Bish grade borrowers. I was always scared away from CFN because of the type of people they lend to. That can't be sustainable, not to say that it still won't go up more in this cycle.

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    2. I would be worried about sub prime lending at the top of the cycle but we are just coming out the other side of the worst recession in 30yrs. These guys lend money at obscenely high interest rates, having said this CFN and RFC are not stocks that you hold forever.

      The market wants to go higher. Negative news today on Canadian jobs and housing but the TSX was up. Remember, the market is always forward thinking.

      100% long equities. Investors are going to be surprised at the upward move in equities over the next 18 to 24 months.

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  8. What do you guys think of ETC and HCG? If you had to pick one, which would you prefer over the long term? Thanks again for all the insight!

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    1. I own HCG and follow ETC. Based on GAARP (growth at a reasonable price), ETC has slightly better value but both are very cheap. ETC has a drip program which is good for a buy and hold investor. HCG has a long history of above average ROE, 15yrs above 20%.

      Look at a 10yr chart and you will see which one has been the better investment. Past performance does not guarantee future returns but if I was to bet it would be HCG.

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  9. I follow both but dont know too much about them. HCG seems to be highly regarded from what i hear. Im going to do a more in depth look and get back to you. Would also include FN in this sector.

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  10. I follow both but dont know too much about them. HCG seems to be highly regarded from what i hear. Im going to do a more in depth look and get back to you. Would also include FN in this sector.

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  11. Four resource stocks that look extremely cheap MND, MMT, ABM & HNL; forward P/E ratios 3.43, 4.55, 5.78 & 7.22 respectively. If you expect commodities prices to firm up these names will outperform in 2013.

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  12. Thanks guys, much appreciated! Also David I had a question for you, I remember awhile back in the comments you listed 10 or so small cap stocks you thought would do well. Could you give a little insight as to how you found them? Or how you discovered any of the stocks you talk about? Its uncanny :) Thanks again!!!

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  13. I use my iTrade stock screener to search for small/mid caps with a P/E ratio under 15 and a ROE greater than 20%. But I get most of my ideas from BNN guests; Jason Donville, Peter Hodson, Fabrice Taylor, Brian Pow, etc. I also get some good ideas from stocktwits. If someone is following a name I like, they are probably recommending a few other names that might be interesting too.

    I than use globe investor to compile a more detailed picture of earnings growth, debt and dividends. Look for a history of 'consistent' year over year earnings growth.

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  14. What do you guys know/think about Morguard Corp. (MRC) Is what they're doing sustainable?

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  15. Never watched MRC. Just had a quick look. Good long term debt/equity ratio for a real estate co, and it looks very cheap. (p/e of 4, p/b of .8) Seems like a good way to have some exposure to cheap real estate assets. Property management business is not too exciting, lots of competition and little barriers of entry. Not too sure about sustainable growth. Looks good tho. Hard assets (real estate) not going anywhere and your getting it below book value. Going to add to my watchlist now :)

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  16. I looked at it briefly a few months ago. Most of the assets are in Toronto, correct?? I don't know the Toronto real estate market well enough to know if it is overvalued or not, so I took a pass. Real estate assets can look cheap until they fall 50% like the US, just saying.

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  17. True that. Thanks for the insight guys!

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  18. Melcor to report year results today, according to their website.

    Trend line pull back for Rifco, great chance to buy.

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  19. Hey guys, ever look at MCR-V. Pipeline services, big growth in 2012. Not sure how sustainable it is. Stock is up big but valuation still looks reasonable.

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  20. Never heard of MCR. The November acquisition looks great. Revenues have increased each year since 2009, up 306% over that period. No reason to think this would change even with continued low natural gas prices. Look at it differently, what would happen if natural gas prices firm up and activity increases. I like it!!!

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  21. Nice! Also I found MSN money's quote tools really useful. They have 10 year summaries etc. http://ca.moneycentral.msn.com/investor/invsub/results/hilite.asp?Symbol=mcr

    check out "highlights" and "Key Ratios" on the left hand side.

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  22. MCR reported year end results on Mar 5th, EPS $0.79. Not sure if you're aware as it was not reported on Globe investor. You can find the financial statements on Sedar.

    Also of note, "The Company expects its revenues for the first quarter of 2013 will be higher than the revenues recorded in the first quarter last year. The increase will be attributable to revenues generated from the pipeline construction and maintenance business acquired from North American Pipeline Inc. in November 2012."

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    1. I bought 1000 shares. Going to buy another 1000 if it goes lower. They earned 58 cents diluted eps. About a 3.5 p/e. Outlook looks good. I read that md&a a couple days ago and i was sold.

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  23. I also bought some shares in both MCR and ENT today but I had to reduce my position in MRD. :( Not sure which one will do better, so I had to buy both. MCR is extremely undervalued and ENT expects its revenue to double this year.

    Why chase the herd into the US markets?? Tons of little gems this side of the border.

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    1. Ya for sure... it's hard to believe you can still find some great companies under 5 times earnings given the great run since 09'.

      What's your handle on Stocktwits again??

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