James Telfser is a partner at Aventine Management Group. His focus is small-cap Canadian equities.
Hudson's Bay Company (HBC-T)
Hudson's Bay has been on our radar for the past year, given their ability to execute transformational deals in retail and real estate. We believe the recent acquisition of German department store chain Kaufhof, combined with the real estate spin-out, has created a lot of value that is not being reflected in the current share price. It is clear that HBC's entry into Europe was prudently approached and management has noted publicly how they had been studying the German market since 2006. Given the extensive due diligence, we believe that there are likely several additional global department store chains that HBC has identified as future acquisition targets. Our conservative estimate of intrinsic value, derived from our sum-of-the-parts analysis, stands at $35. Given that shares are currently trading under $20, we see a discount of over 40 per cent, which we view as much too large.
Winpak produces specialty plastic packaging for perishable foods, beverages, dairy products and a few non-food sectors. Winpak has a few large competitors but management has shown the ability to steadily grow revenue over several decades and win significant contracts from blue chip companies such as Hormel and Tyson Foods. The company's valuation multiple has benefited from both its organic growth and the margin expansion created from a lower Canadian dollar. We like that Winpak generates consistent free cash flow and has no debt. We also like how management has rewarded shareholders with two special dividends over the past two years with the most recent being announced earlier this month at $1.50 per share. We view Winpak as a high quality business with a more than 30-year history of creating value for shareholders and several tailwinds that support a strong intermediate term outlook.
Clearwater Seafood (CLR-T)
Clearwater Seafood is involved in the harvesting, processing and distribution of seafood around the world. The company enjoys a "wide moat" based on their control over various harvesting quotas, which are issued by the federal government in limited supply. Clearwater also falls into the group of companies that benefits from a lower Canadian dollar, lower fuel costs, and the continued strength in fresh seafood pricing on global markets. We were disappointed with their recent earnings miss and have reduced expectations for the upcoming quarter, but looking through these issues we see a strong second half as their new clam vessel starts contributing to cash flow and they enter a period of seasonal strength. In addition, we are intrigued by their recent $55-million bought deal which we believe has the potential to fund an acquisition. We also note that insiders took $15-million of the issue, a great indicator of their confidence in the company's prospects. In terms of valuation, Clearwater is trading at a reasonable 7.5x our expected EBITDA, which we believe is an excellent valuation to initiate a position.
Past Picks: October 24, 2014
New Flyer Industries (NFI-T)
Then: $13.10 Now: $19.22 +46.72% Total return: +52.78%
As of May 27 , 2015: $28.26 Now: $43.17 +52.76% Total return: 53.79%
Then: $2.78 Now: $2.25 -19.06% Total return: -19.06%
Total Return Average: +29.17%
These are challenging times for the market, as intense volatility weighs on sentiment and keeps our long positioning relatively light.
The aggressive selling in August (the S&P 500 fell 10.2 per cent in four trading days) has left the market with a hangover that we believe will take some time to work through.
Our expectation has been that after a "throwback rally" we would see a re-test of the August lows, and that appears to be underway now. While difficult, this is a necessary part of the bottoming process and is required to move forward. Our risk model had been flagging the environment as high risk, and therefore we have been holding nearly a quarter of our portfolio in cash through most of September.
At current levels, we see the risk-reward outlook for Canadian equities becoming more favourable, and Monday's sharp sell-off has put the market into a zone where value investors should feel comfortable reducing hedges and selectively putting cash back to work in undervalued businesses.