Comstock
For Bob Gibson, covering the Canadian retail and consumer-product business isn't about heading to the mall and hitting every store. It's about discovering the little gems that are sometimes found around a less-travelled corner.
"We try not to cover stocks that are mainstream," said the 56-year-old Octagon Capital Corp. analyst, who has spent most of the past 30 years tracking Canada's retail landscape. "We try to find neat little companies that are overlooked.
"Often, they're undervalued."
Stock market analytics firm StarMine Corp. ranks Mr. Gibson first out of 14 Canadian retail-sector analysts, based on the performance of his stock recommendations for the past 12 months. Data compiled by StarMine show that as of the end of July, Mr. Gibson's recommendations had generated excess returns of 14.4 per cent above the overall Canadian retail sector over that period, edging second-place Perry Caicco of CIBC World Markets (13.8 per cent).
StarMine's industry excess returns ratings use each analyst's stock recommendations to create a "long-short" investing strategy – mimicking the effect of going long on stocks the analyst rates "buy" and shorting the stocks he or she rates "sell". This way, the analyst gets credit for both "buy"-rated stocks whose returns exceed the overall industry benchmark, and "sell"-rated stocks whose returns underperform the benchmark. (Stocks rated "strong buy" or "strong sell" are awarded double credit; ratings of "hold" or "neutral" receive no score.)
Mr. Gibson starts by looking for "some sort of catalyst" in one of these small, undervalued names that could ignite growth and investor interest – like, for example, in Boyd Group Income Fund , a Canadian operator of auto-collision-repair centres. He initiated coverage of Boyd Group last October with a "buy" recommendation, shortly after the company had completed a significant U.S. acquisition. Since then, Boyd Group's stock has more than doubled, making it Mr. Gibson's biggest winner of the past 12 months.
But identifying an overlooked name with a catalyst is just an early step in the evaluation process, Mr. Gibson said.
"Then you look at the numbers – are they well-valued, is there growth?" he said. (In terms of valuation metrics, he favours price-to-earnings, enterprise-value-to-EBITDA and enterprise-value-to-sales as the best yardsticks.) "Then I'll go talk with management," he said.
"If we like what we see, then we'll write it up."
Tim Gaumer, director of fundamental research at Thomson Reuters – the owner of StarMine – noted that Mr. Gibson's search for hidden gems has stumbled in a few instances over the past 12 months. (For example, Indigo Books & Music Inc. has fallen 8 per cent while Mr. Gibson has maintained a "buy" on the stock over the past year.)
But his hits have far outweighed his occasional misses.
"Over the past 12 months, Bob's top-ranked stocks have handily beat those he rated hold and below," he said. "His buy-rated selections have returned an impressive 33 per cent over this time frame. Conversely, his hold- and sell-rated companies have appreciated just 3 per cent."
"This analyst strikes me as someone who has been outstanding at ferreting out lesser known companies undergoing positive change," he said. He added that two of Mr. Gibson's biggest winners of the year v- Boyd Group and eyewear retailer Coastal Contacts Inc. – have market capitalizations of less than $200-million. "Boyd and Coastal Contacts weren't exactly companies on everyone's radar screen."
Mr. Gibson characterized the conditions for retail and consumer-product stocks over the past year as "very challenging." He said rising prices for commodity raw materials have driven up costs for both producers of consumer goods and for retailers, while the strong Canadian dollar has hindered revenues for exporters of such products.
However, he believes that current valuations are "in line with historical fair values" – and, in some cases, below those historical norms. And, he added, companies with exposure to online shopping have growth opportunities even in an uneven macroeconomic environment.
That's one of the reasons he's attracted to Indigo Books and Music Inc. The Canadian book retailer is his current top pick – despite being a major player in what has to be one of the most troubled and uncertain segments in retailing. Just last month, one of the biggest bookstore chains in North America, Borders, went into liquidation – news that helped send Indigo's stock into a deep funk.
"If you look at [Indigo's stock]chart … everyone's tarring bookstores with the same brush," Mr. Gibson said. "But this company is a lot more than just books. It's big into toys and kids' products, and gifts of all descriptions. On top of that, there's the interest in Kobo [Indigo's electronic-book-reader technology]
"I think they've got it right," he said.
Because the sector is highly sensitive to the uncertain economic outlook, Mr. Gibson expects "very challenging" to remain a fitting description for retailers for the next 12 months. But despite that, he said there are still opportunities to be found by the astute investor who does his or her homework.
"Within that [environment] you kind of have to pick your names," he said.
David Parkinson