In the first half of 2021, several Canadian companies bought portions of their shares to reduce the number outstanding. Such companies have a good chance of outperforming the stock market in the years ahead, according to academic studies. So, let’s take a look at the top seven cases, as identified by investment newsletter Kuppy’s Event Driven Monitor.
Not all buybacks are equal. A seminal paper by University of Illinois professor Josef Lakonishok and two associates found that value companies outperformed by 45.3 per cent four years after a buyback while glamour companies did not show any outperformance after their buybacks.
Legendary investor Warren Buffett wrote in his 2020 letter to Berkshire Hathaway shareholders that share buybacks make sense when a company can buy its own shares below their intrinsic value. Estimating intrinsic value is not a precise science and requires checking several criteria, as Mr. Buffett notes, but one rule of thumb he has often followed is to repurchase stock in his own company when the price falls below 1.1 times book value.
Dundee Corp. retired 15 per cent of its class A shares over the past six months, which was the second-largest buyback of all U.S. and Canadian companies in the first half of 2021. Ratios of price-to-earnings (2.0), price-to-book-value (0.4) and debt-to-equity (0.1) indicate considerable undervaluation.
Dundee is a Toronto-based diversified holding company with operations in investment management, corporate finance, energy, resources, agriculture, real estate and infrastructure. Its class A stock has been in a long downtrend, from a high of $37 in 2013 to the current $1.47.
After the financial crisis of 2008 sparked massive money printing by the Federal Reserve, Dundee founder Ned Goodman repositioned Dundee’s capital toward gold, energy and other inflation-sensitive assets. But inflation remained tame in the years that followed.
Mr. Goodman retired in 2014 and his son, David, took the reins. With the inflation bet not working too well during his tenure, he launched initiatives to move the company in other directions but resigned from the chief executive role in 2018 because of health reasons.
His brother, Jonathan, who previously had built up a Dundee subsidiary, took over and is now president and chief executive officer. His plan is to refocus Dundee on its “roots as a mining-focused, active investor” by divesting and monetizing non-core operations to free up capital for acquiring and developing mining projects. Since the adoption of this plan in 2018, there have been growing signs that the commodity cycle is turning up.
Dundee director Andrew Molson (chairman of Molson Coors Brewing Co.) acquired more than $200,000 worth of shares this winter and spring. Director Murray Sinclair (chief investment officer with merchant bank Earlston Investments Corp.) bought three million shares last summer.
As of March 31, Dundee’s balance sheet shows $72-million cash, debt of $27-million and net assets of $412-million. Capital loss carry-forwards stood at $278-million and are not recognized in the accounts. Operating loss carry-forwards, mostly unrecognized, were $445-million.
CES Energy Solutions Corp.
CES Energy Solutions, a provider of chemicals to oil fields for cleaning, stabilizing and enhancing drill rates, should benefit if the rebound in the energy sector continues. In 2021, one insider acquired $452,000 worth of stock.
Precision Drilling Corp.
Precision Drilling is the market leader in Canada for contract drilling in the oil and gas sector. Its shares have more than doubled since March of 2020, yet remain about two-thirds below the high reached in 2017. Price-to-book-value is still around 0.5 and significant cuts to operating expenses provide earnings leverage to a recovery in the oil and gas sector.
Kirkland Lake Gold Ltd.
Four insiders have bought $812,000 worth of this gold miner’s stock in 2021. Gold stocks may come in handy as a hedge against financial and political upheavals.
Sailfish Royalty Corp.
This precious-metals royalty company receives a percentage of the revenues generated by several gold and silver mines to which it previously provided capital.
Knight Therapeutics Inc.
Knight Therapeutics is a specialty and generic drug manufacturing company focused on distributing innovative pharmaceutical and other health-related products. Six insiders purchased a total of $362,000 in shares in 2021. Stockholders are hoping that founder and chief executive officer Jonathan Ross Goodman can do for Knight Therapeutics what he did for Paladin Labs.
Westshore Terminals Investment Corp.
Westshore Terminals operates a coal shipping terminal on the coast of British Columbia, and pays a dividend yielding 4.7 per cent. As the global economy continues to pick up steam, Westshore may have its boats lifted too.
Full disclosure: The author owns shares in Dundee Corp.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.