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A buy recommendation for Cineplex Inc. landed second place in the ACIIC Stock Pitch Competition.Matthew Sherwood/The Globe and Mail

At a fall conference last year, the Association of Canadian Intercollegiate Investment Clubs (ACIIC) held its annual Stock Pitch Competition – a challenge in which contestants make their case for one stock to a panel of industry professionals. The winning picks have done well since then: They are up an average 12 per cent, ahead of the 7.5-per-cent gain in the iShares Core S&P/TSX Capped Composite Index ETF.

It's perhaps not surprising the choices have outperformed. ACIIC members attend university business programs such as the Ivey Business School at Western University, and belong to the investment clubs operating at these business schools. Many of the members will be joining investment firms such as Morgan Stanley and BMO Nesbitt Burns after they graduate.

The ACIIC has just wrapped up its fall conference for this year and announced a new set of winners for the Stock Pitch Competition.

In first place was a buy recommendation for Interface Inc., from the team of Graeme Dymond, Jerry Zhang, Kelly Jin, Shehryar Mansoor and Justin Yau. In second was a buy recommendation for Cineplex Inc., from the team of Isaac Fisher-Jhirad, James Jung, Shirley Jiang and Jason Chen.

Interface Inc., headquartered in Atlanta, is the world's largest manufacturer of modular carpets for office, commercial, and residential locations. Modular carpets can be easily separated and pieced together; this ability to rotate and place carpet tiles is highly useful for areas with heavy foot traffic.

Modular carpets last longer than traditional glued broadloom carpets while costing significantly less than hard surfaces. Also, Interface's patents on Tac Tiles and Glasbac "provide them with a sustainable competitive advantage," notes the presentation of Mr. Dymond et al.

The operating margin, at 11.3 per cent, has been improving due to lower raw-material prices and production efficiencies. It should continue to improve given management's focus on cost-reduction initiatives, new products with higher margins and techniques to enhance productivity.

The company also has new market niches to tap, notably schools and hospitals. Its existing niches continue to enjoy organic growth: the Dodge momentum index is signalling a strong uptrend in U.S. non-residential construction, and the trend toward renting points to more rental buildings. Plus, overseas markets have penetration rates for modular carpet that are much lower than in the United States.

Return on invested capital is above 14 per cent and the dividend yields 1.4 per cent. Valuation is modest: The price-to-earnings ratio stands at 10.4, compared to 17.5 for the industry average.

Cineplex Inc. is the largest cinema company in Canada, with a market share of 93 per cent. "Capital expenditure requirements create a high entry barrier for possible cinema companies to grow and decrease Cineplex's market share," notes the presentation by Mr. Fisher-Jhirad et al.

"Fear of disruptive trends overshadows the value of a dominant player with an economic moat and diversified offerings," argue Mr. Fisher-Jhirad et al. Netflix and other software-based entertainment providers are seen as threats to traditional cinema chains but Cineplex is still growing.

Management has succeeded in diversifying to the point where just half of box-office revenues come from movie showings. New "premium offerings" include Scene (a movie-reward card) and Timeplay (a gaming experience that movie-goers play before movies start). "As premium offerings grow … margins will expand [since] premium offerings are the highest margin segment," claim Mr. Fisher-Jhirad et al.

Cineplex can also look forward to healthy revenues from cinema operations given movie content in the pipeline. Planned are films featuring more of the super heroes and villains from Marvel Comics and DC Comics, as well as more releases by Lucasfilms Ltd. to complete the Star Wars series.

Cineplex looks richly valued, trading at 25 times earnings – but not when benchmarked against comparable firms such as Imax Corp. Debt is only 40 per cent of equity, and management has a policy of raising the dividend, now yielding 3.2 per cent.

Larry MacDonald is an economist, author and financial writer.

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Editor's note: A previous version of this article stated the buy recommendation for Cineplex garnered first place in the Stock Pitch Competition, with the Interface pick coming in second. In fact, the Interface recommendation won first, followed by Cineplex.

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