Who?
Michael Smedley, executive vice-president and chief executive officer, Morgan Meighen & Associates
My Best Investment
In my job, in the main, I'm a stock picker in Canadian and international markets, and the philosophy of our biggest fund, Canadian General Investments, is long-term investments for growth and income.
As such, it's really quite easy for me to single out a particularly spectacular investment, due to its presence in our portfolio over the past 10 to 15 years, and yet one that's little known by people in the stock market in Canada: BMTC Group Inc.
The company's the No. 1 furniture and furnishings supplier retail chain in Quebec. It's listed on the Toronto Stock Exchange.
It's not particularly visible because there are not a lot of shares in the market. The number of shares, in fact, prior to a 2-for-1 stock split in April, was only 15.8 million.
It is, like Leon's, which is the No. 2 in Quebec, a company controlled by a family, or families; unlike Leon's, it tends to be extremely quiet in its contact with the investment world, issuing information in the orderly, regulated way, but not tending to communicate beyond that. You don't see it presenting at conferences, and you don't see it quoted in the press.
The management is a very strong, long-term family management, which we understand the merits of, as we have that ourselves in our own group. It has, in this particular case, very hands-on management. In other words, one presumes inefficiencies do not escape attention.
Because of its extremely conservative nature, it is very little followed by analysts. Because it does not raise capital, it does not get coverage by the mergers, acquisitions and corporate finance departments of investment banks.
Overall, it's the textbook representation of a stock which is mostly highly illiquid, which is not known by a lot of investors.
The Return
If you were to look at BMTC's performance in Canadian General Investments, you would see that the actual cost of the position held totals $3.8-million, bought over the years, and the market value, as of March 31, was $22.7-million.
It's a solid payer of growing dividends, but bear in mind that as the stock appreciation is high, the yield is only about 1.1 per cent.
It has a low current yield, but as it is so often with high-quality companies, the actual dividend payment grows.
Shares have been sold over time, but very few, whereas the company itself does have a clear tendency to buy in the shares. We are, after the family and the giant Fidelity Group, the No. 3 shareholder, and have been for many years.
It is our No. 1 stock in the portfolio, because of the high quality of returns, and that is despite having sold down 100,000 shares only a few months ago. The holding went down from the top position, but has now gone back up because of appreciation of about 50 per cent over a couple of months because buyers have emerged - probably associated with the relative stability of the Quebec housing market, and therefore the presumed stability or improvement of furniture and furnishing sales.
I have to admit that the stock woke up again, as it has done in past years, after I disposed of that 100,000 share block.
I have no discomfort with that, and in fact for another of our funds, Third Canadian General Investment Trust, at about the same time, I bought nearly 97,000 shares which were offered into the market by someone else, and I placed it in that fund, and it is now the No. 4 holding in that fund.
Which is amazing, isn't it?
I divested the 100,000 shares in the main fund, and what does tend to happen with an illiquid stock is that other people tend to notice that trading is taking place, and they become more interested in exploring a sale or a purchase. That is a characteristic of the less-liquid parts of the trading market, and I say it's important not to ignore that, because there are a lot of relatively illiquid situations in the Canadian stock market which are, indeed, very attractive.
The Takeway
I think, in investing in BMTC, it was recognition that it was the entrenched leader in its markets, and is, in fact, a household name in Quebec.
Its ability to grow and to pay good dividends, and to appear to backstop its own shares by trying to buy them in, had great appeal to me. And I do like to buy quality that is unusual, if I can find it.
I think, at this time, looking now at the fundamentals, it's in a position near term to announce higher earnings, so clearly, the model still fits our long-term objectives.
Long-term, this company has proved itself. It is important to realize that if a company is run well, and it is entrenched by way of its brand, its reputation, and its product, it is a rare entity and it is probably going to maintain those qualities for years to come.
The common threads of good companies are long-term stability and performance, and the record of management.
One looks at the niche presence in an important industry. One looks at the dominance of the company in its niche or sector, and one looks at the financials.
One also looks at the debt levels to see whether they're lined up healthily, if they exist at all, in keeping with the type of company in the industry at which you're looking.
We like dividend income, but we don't necessarily have to have that everywhere, if funds are being put back into the company to grow it, as is the case of, say, Research In Motion.
In the end, BMTC is a confirmation of there being hidden treasures in the stock market which some people, like Michael Smedley, like to unlock.
Editor's note: This article has been updated from its original publication.
Editor's note : If you would like to receive articles like this by email newsletter, you can sign up to get them for free at The Globe and Mail. All you need to do is register for the site, or if you've already registered, login and go to your profile at the top of the homepage. Once you're in your profile, look under Newsletters and Alerts and look for the Business and Investing newsletters. These include:
- Personal Finance Reader, put together by Rob Carrick this is a biweekly summary of the best personal finance and investment reading on the web
- Business Ticker, a summary of the day's top business stories
- Berman's Market Update, a summary of the markets at the open, noon and close
- Globe Investor Magazine, a biweekly collection of smart investment ideas and portfolio management stories
- Trade by Numbers, a monthly collection of articles exploring an investing trend or theme