James Telfser is portfolio manager at Caldwell Investment Management. His focus is on Canadian large caps.
Home Capital Group Inc.
The fundamentals look great for HCG with a forward P/E of less than 8 times, return on equity of 25 per cent and a very strong ranking on our momentum checks. Management was upbeat on their last quarterly call, suggesting activity on their book of alternative mortgages is still improving. Originations continue to show very strong growth as the big banks turn away loans at their low end of the quality spectrum, which means they are at the high end of HCG’s quality spectrum. We feel that the fear of a housing meltdown is overdone and that as that fear dissipates the multiple should expand.
Valeant Pharmaceuticals International Inc.
VRX has been very active with acquisitions over the past few years in an effort to significantly ramp up its revenues (20 per cent annualized over five years), which continues to bode well for revenue growth and synergies in the years to come. Even though the major jumps in revenue have come through acquisitions, organic growth has been very strong lately, in the 9 per cent to 10 per cent range. They have a lock on dermatology in North America, which provides organic growth opportunities, and the emerging markets exposure makes it even more interesting from a diversification standpoint.
CGI Group Inc.
CGI has grown organically and through acquisitions over the years, effectively doubling the size of the company every five years. Sixty-eight per cent of its revenues are recurring and their area of business is very attractive as it focuses on reducing costs and driving efficiency. That makes it an easy sell, particularly in a low-growth environment. The company recently made a great acquisition in Europe, Logica, that management feels will be accretive to earnings in the neighbourhood of 25 per cent to 30 per cent. Their management team has had so much experience with their acquisition model that we put a high probability of success on this deal. They are trading at a reasonable forward P/E of 13 times with a 15 per cent ROE and an improving growth profile.
Past picks: Jan. 23, 2013
WestJet Airlines Ltd.
Total return: 11.54%
International Forest Products Ltd.
Total return: +9.22%
Davis + Henderson
Total return: +1.86%
Total return average: +7.54%
We are using any weakness in the markets to accumulate new positions. We have been fully invested through much of the volatility in the past year, which has worked out very well, and we see no immediate reason to give up on this strategy now. We feel quite strongly that valuations on stocks are still very attractive relative to fixed income, which bodes well for further gains in equities. In addition, we have constructed a portfolio that has an aggregate price-to-earnings and price-to-cash-flow multiple of 10.5 times and 6.2 times, respectively, which is a very compelling reason to be involved in equities. Even more exciting is that these stocks also have a return on equity of 20 per cent. This tells us that there are still great companies trading at reasonable multiples, but to take advantage you have to nimble (getting out of losing sectors abd stocks quickly) and be very much a stock picker.
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