Canaccord analyst Sara Elford
Sara Elford used to spend two hours a day commuting to and from her office in downtown Vancouver. Then, a few years ago, she and her husband decided to head east - all the way to Halifax. "It was a life-work balance thing," says Ms. Elford, who has won numerous awards as an analyst with Canaccord Adams. Though the move hasn't really helped on the work side - she still crisscrosses the country regularly and clocks long hours at the office - at least she can now ride her bike or walk to work. And for someone who specializes in covering sustainable and clean-tech companies, that's a real bonus.
A benefit to living far from Bay Street is that it's much easier to engage in independent analysis and thought. "There aren't many analysts in Halifax," says Ms. Elford, who joined Canaccord in 1998. "Personally, being removed from the crowd hasn't been a bad thing for me. I've never been very good at following the crowd."
Let's be clear. Ms. Elford isn't an analyst of ethical investing, which now accounts for roughly $500-billion (U.S.) in assets worldwide, according to the Toronto-based Social Investment Organization. Her job isn't to figure out which companies are greener than others. What she's working to do is find the next great emerging Canadian company with the next great green idea.
"I'm trying to find companies that are either developing new technologies that facilitate more sustainable behaviour or playing an active role in deploying those solutions within an industry," says Ms. Elford, a CFA who worked in investment banking in Vancouver and New York before switching to research 13 years ago.
There are lots of small green companies to choose from. WaterFurnace Renewable Energy, WFI-T for instance, manufactures geothermal heat pumps. And despite the crash, the company (based in Fort Wayne, Ind., but traded on the Toronto Stock Exchange) pays a dividend and is trading a few dollars below its 52-week high. Calgary-based Pure Technologies PUR-X helps monitor bridges, pipelines, buildings and reservoirs to ensure they're operating efficiently. Carmanah Technologies, CMH-T a 13-year-old Victoria-based company develops self-contained solar LED and power systems for industrial and commercial applications - think marine beacons and runway lights. It's trading under a buck, but Ms. Elford is convinced it's got huge potential upside as its solar LED lights start to penetrate the outdoor general illumination market in the next five years.
While WaterFurnace, Pure Technologies and Carmanah aren't immune from the current economic turmoil, they're certainly better positioned than most companies. "They are leaders in very specific niches, have an economic value proposition, and they're profitable and well-funded," says Ms. Elford, who has buy ratings on all three stocks.
The Lunch Test Rule
When an analyst initiates coverage of a company, it's sort of like getting hitched - you could end up writing research reports on that company for 15 years or more. And if you're like Ms. Elford, that means regular meetings with management.
"So you need to be very comfortable with the people you're dealing with - their honesty, their integrity, their ability to deliver, their ability to execute," she says. "And if I have any inkling that's not there, I don't care how compelling a company looks, I probably wouldn't take it any further." That means she spends a lot of time getting to know the people behind the business: What are they like? What's their background? What drives them? She calls it the Lunch Test Rule. "The older I get," she says with a laugh, "the more ornery I get."
Slow But Steady
No matter how much she likes sitting down with the CEO, though, Ms. Elford never jumps in too fast - it could take a year for her to decide whether she wants to issue a formal "buy" or "sell" recommendation on a company. "If I hear a management team say, 'We think we can do $20-million in revenue next year,' I'll watch them for that year," she says. "Do they hit their milestones? Do they do what they say they're going to do? If they do $2-million, they'll probably fall off my radar screen." Then there's the technology - Ms. Elford rarely takes on companies whose product is still in the lab; she needs to see it in action. "Sometimes, that means I need to wait until there's a pilot plant of a reasonable scale or, if it's a gadget, that it's actually had some success within a niche market," she says. "For every 20 companies I look at, I'm lucky if I find one that interests me."
What's The Plan?
It's one thing to have a promising technology; it's quite another to turn it into a viable business. If the business model isn't there - for instance, the product may be very capital-intensive to develop or wildly competitive because of low barriers to entry - neither is Ms. Elford. If she sees something she likes, Ms. Elford will spend at least three months "trying to get my mind wrapped around what the business model and strategy is, what the economics look like, what the barriers may be, and doing a risk analysis to see if it's compelling." Exactly what is she looking for? "I know an excellent business when I see one," Ms. Elford says, "and the best ones tend not to be particularly capital-intensive, have the potential for high margins, and tend to have a recurring revenue stream." Of course, there are lots of estimates that go into figuring all this out, and no one's ever going to get it bang on - "not even close, frankly, because forecasting is tricky at best." At the end of the day, Ms. Elford uses her gut. "I know what I'm looking for," she says, "and if I find it, I can get quite excited."
Stocks, Not Sectors
Ms. Elford calls herself a generalist - she's not an expert on solar or water or geothermal. "I would describe myself as a little bit of a stock picker as opposed to a sector follower," she says. "I always tell people, if I follow 12 companies, I follow 12 industries." That means she has to work hard at not getting bogged down in minutiae. "If you understand the business and you understand the strategy and positioning," Ms. Elford says, "you can have a pretty good idea of how everything they do fits into the overall plan and vision."
Understand Risk Tolerance
A while back, a retail investor chided Ms. Elford for putting a "speculative" buy rating on early-stage stocks she likes (including Bio-Extraction Technologies Inc., BXI-X a canola processor that's about to open an extraction plant in Saskatoon and another favourite of Ms. Elford). "That's a cop-out to get you off the hook if it doesn't work out," the investor told her. "Either it's a buy or it's not." Um, no, responded Ms. Elford. "The idea is that I think the potential reward outweighs the risks, but when you're trying to commercialize a technology, there are things that can go wrong. We don't have crystal balls, and I need you to know that this is not something you should put 100 per cent of your money into."
And no matter how much is invested in a stock, Ms. Elford cautions not to get married to it. "At the end of the day, one quarter doesn't make a trend," Ms. Elford says. "But if you've got four of them, you eventually have to realize that perhaps you've made a mistake. Know when to cut loose and when to stay on track."
Favourite Stock
Buy shares in Stantec Inc., STN-T a billion-dollar Edmonton-based engineering and design consultant with a huge environmental practice, she says, adding that its the least risky of her top picks, which is why she chose it. "They're not a developer of technologies, but they can play an important role in their adoption," Ms. Elford says. "That's a critical role, because there is no magic bullet. Most companies within the clean-tech space are going to tell you their solution is the be-all and end-all, the one that's going to solve any number of problems. The reality is, that is very rarely the case."
The payoff: It's not hard to see why this is Ms. Elford's favourite company. It's been profitable for each of its 55 years. Though the stock was hammered during the stock market collapse, it has since started to recover - it's trading at about $28, nearly the same price as a year ago. But Stantec has still posted a five-year return of 173 per cent to the end of 2008.
The big risk: Nervous investors and market volatility. Plus, with the economy in freefall and credit markets frosty, some of Stantec's projects could be put on hold. But Ms. Elford's not worried: At any given time, the company is working on thousands of projects in North America. "That's the beauty of Stantec's risk mitigation model," she says. "The company was designed to weather both the good times and the bad."
Why listen to Ms. Elford on this one? The award-winning analyst has been covering Stantec for seven years, ever since a three-hour meeting with now retired CEO Tony Franceschini (who comfortably passed her Lunch Test Rule) prompted her to spend six months intensely analyzing the company's track record. Oh, and Stantec is a core holding in Ms. Elford's personal RRSP.
Dawn Calleja