Barry Schwartz is chief investment officer and portfolio manager, Baskin Wealth Management. His focus is North American large caps.
Dr. Pepper Snapple (DPS.N)
Market Cap: $16.5-billion (U.S.); EV: $19-billion; 2016 P/E: 20x; 2016 EV/EBITDA: 12x; Dividend Yield: 2.4%
Dr. Pepper is a stable company that generates a ton of free cash flow and has continued to raise its dividend ever since going public. We see a long runway for growth internationally, since only 11 per cent of Dr. Pepper's revenue is currently generated outside of the U.S., versus over 40 per cent for competitors Coke and Pepsi. On a valuation basis, it is cheaper than its peers with higher potential for growth as the management continues to strengthen the company's distribution platform. Finally, Dr. Pepper has many strong and well-known brands, and it could be an acquisition target for a company looking to boost its portfolio in the sluggish growth environment.
Hardwoods Distribution (HWD.TO)
Market Cap: $281-million (Cdn); EV: $311-million; 2016 P/E: 12x; 2016 EV/EBITDA: 7.8x; Dividend Yield: 1.3%
Hardwoods is a wholesale distributor of wood flooring products. In our opinion, this company is a great way for Canadians to play the continued housing recovery in the U.S. Eighty per cent of Hardwood's revenue is generated in the U.S., with 60 per cent coming from the residential sector. Housing starts in the U.S. are still far below the historical average (1.1 million in 2015 vs. 1.36 million historically since 1960). Hardwood's revenue in 2015 was up 23 per cent, and we expect double-digit growth in 2016 as well. Despite these rosy conditions, Hardwood is cheap, trading at just 12x expected 2016 earnings. The dividend has also doubled over the last three years, and it should continue to grow as the housing market normalizes.
Korn/Ferry International (KFY.N)
Market Cap: $1.6-billion (U.S.); EV: $1.5-billion; 2016 P/E: 11x; 2016 EV/EBITDA: 4x
Korn/Ferry is a headhunting company specializing in executive search. Even though the company is expected to report over 20-per-cent earnings growth next year, Korn/Ferry is trading at a deep discount to its historical price/earnings ratio. The company has been busy integrating its recent acquisition of Hay Group. Hay specializes in HR services and provides a stable stream of annuity revenue that counters the cyclicality of the executive search business. Korn/Ferry started a dividend in 2015, and we expect an increase this year.
Past Picks: February 24, 2015
Precision Castparts (PCP.N) *Bought by Berkshire Hathaway January 29, 2016
Then: $215.13 01/29: $234.95 +9.21% Total return: +9.27%
Then: $150.00 Now: $143.01 -4.66% Total return: -4.16%
Then: $536.09 Now: $733.53 +37.21% Total return: +37.21%
Total Return Average: +14.11%
At Baskin Wealth Management, these are the two most frequently asked questions:
1. Is it a good time to invest?
2. Don't you think we should wait until the volatility calms before we invest?"
I am asked these questions every single year, and my answer is always the same: If you have a long investment horizon and can avoid checking your stock prices on a daily basis, then the best time to invest is when you have the cash.
Volatility is always present, and in the short term, volatility equals risk. The day-to-day movement of stock prices will be random and often aggressive over a one-year period. Long-term investors should use this volatility to their advantage to acquire high quality companies at marked down prices. Sometimes you will pay too much in the short run, and sometimes you will get a great bargain. However, if you are willing to hold on to high-quality compounding investments, than your portfolio should grow over the long run.
We continue to find high-quality investment ideas in this environment and have more ideas than room in our portfolio. We are aggressively adding to existing holdings in both Canada and the U.S. We believe that a diversified portfolio of non-resource companies will outperform fixed income alternatives over a three- to five-year period, and, as a result, we are overweight in equities for most clients. Many of our best performing investments have been held for years, and the companies that our clients own now will be held for many more years to come.