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.