As a portfolio manager at Lincluden Investment Management, Robert Gill isn't looking to flip stocks for a quick buck. His firm, which manages about $3.5-billion for clients including pension funds and high net worth individuals, takes a long-term view of investing.
"When we buy a stock for the portfolio, we buy it with the intention of not selling it. We prefer to hold onto it in perpetuity and just have the stock continue to move up," he says.
With buy-and-hold investing, it's critical to understand the business and the factors that will contribute to its staying power.
"We look for competitive advantages, we look for economic moats, we look for barriers to entry. The business model has to be durable," he says.
As a value-driven shop, Lincluden keeps a watchlist of about 200 companies that it considers attractive.
To make the list, a company has to generate high return on equity (ROE) and have a strong balance sheet, ideally with a net debt-to-equity ratio of less than 40 per cent. Lincluden also looks for companies that can easily cover their debt obligations, as indicated by a ratio of EBIT (earnings before interest and taxes) to interest of five times or greater.
Among other factors, it also looks for a track record of free cash flow generation that can be used to reward shareholders with growing dividends, and a management team that deploys capital effectively to create value.
Even if all of these stars align, however, Lincluden won't invest if it considers a stock too expensive. "Value is a function of two things – one is quality, two is price," Mr. Gill says. As such, Lincluden will often watch a company for months before pulling the trigger on a purchase.
The firm holds plenty of blue-chip dividend stocks – banks, insurers and telecoms, for example – but it owns some less-familiar names as well. I asked Mr. Gill to discuss five of his firm's current holdings. Remember to do your own due diligence before investing in any security.
Deere & Co. (DE-NYSE)
Close: $87.29 (U.S.), up 48¢
Yield: 2.7 per cent
Deere's ROE has averaged about 40 per cent over the past five years – nearly three times the average ROE of the S&P 500.
"That's a very, very impressive number," Mr. Gill says, and it reflects the company's strong and growing profit margins. The world's largest agricultural equipment maker and the second-largest maker of construction equipment in the United States, Deere trades at an attractive trailing price-to-earnings multiple of less than 10.
The company has been riding a wave of high crop prices in recent years and its earnings are expected to cool, but Mr. Gill considers the stock a "no-brainer for a long-term hold."
Buckle Inc. (BKE-NYSE)
Close: $49.07, up 42¢
Yield: 1.8 per cent
Because fashion tastes can change quickly, clothing retailers are generally risky investments. But Buckle, based in Nebraska, is all about basics – jeans, casual tops, shoes and accessories. "That's about as staple as you can get to your wardrobe," Mr. Gill says.
The yield may seem small, but Buckle also declares special dividends every year or so – $1.20 in 2013 and a hefty $4.50 in 2012, for example – that aren't reflected in that number. The trailing P/E of 14.5 is "fair" for a company that generates ROE north of 40 per cent, he says.
North West Co. (NWC-TSX)
Close: $23.58 (Canadian), up 1¢
Yield: 4.9 per cent
Like the idea of owning a retailer, but hate the idea of competing with Wal-Mart and Target? North West sells food and other staples through stores in remote regions, including Northern Canada and rural Alaska, where competition is virtually non-existent.
"If you need anything, from a bag of milk to an all-terrain vehicle to a snowsuit to a quart of oil, you are going to the North West Co.," he says.
And if you need a rising dividend, North West offers that, too: The former income trust has raised its dividend three times since converting to a corporation in 2011.
Canadian Oil Sands Ltd. (COS-TSX)
Close: $17.38, up 20¢
Yield: 8.1 per cent
Canadian Oil Sands, which owns a 36.7-per-cent interest in the Syncrude project in Alberta, has been hammered by plunging oil prices.
Most analysts have a "hold" or "sell" on the shares, but Mr. Gill has been buying on the recent drop and believes the quarterly dividend of 35 cents – which yields about 8 per cent annually – is safe.
"I'm not saying there will never ever be a dividend cut, but at this price level [for crude oil] we don't expect there to be a cut," he said. "This is a lower-cost operation so it's still profitable at these levels."
Constellation Software (CSU-TSX)
Close: $329.15, up 5.77
Yield: 1.4 per cent
Constellation Software's stock has surged about 45 per cent in 2014, after posting double-digit gains in each of the previous five years.
And there's likely more where that came from, Mr. Gill says. The company has grown rapidly by making smart, strategic acquisitions of small software developers, and it now serves 30,000 customers in more than 30 countries.
But the stock has had a big run and is "expensive," with a P/E of 21.8 based on adjusted earnings estimates for 2015. "This is a very high quality company, with excellent management. We would be buyers [of more shares] on a pullback," he says.