Category: Weekly Commentary

29 Jun 2017

Issue 26 – Take Your Vitamins

If you have never seen this product, I don’t know where you shop. Jamieson Wellness is the leading Canadian vitamin company. Its products are distributed in every major food retailer, drug stores, health food stores and can even be purchased on Amazon. Jamieson’s market share is approximately 2.5 times greater than its largest competitor (Centrum). The company and its brand is clearly the leader in the Canadian vitamin market.

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22 Jun 2017

Issue 25 – The Marriage is Approaching

Potash Corp (TSX:POT) and Agrium (TSX:AGU) announced that the combined company will be called Nutrien. We are expecting the marriage to be finalized in the third quarter of this year. Once combined, Nutrien will be the global leader in reliable, low-cost crop nutrient production, combined with the largest agricultural retail-distribution network in the world. We are not expecting any recovery in fertilizer prices in the short-term. The attraction of the combined company comes from the potential synergies and future free cash flow growth. Even if fertilizer prices are flat, we are expecting free cash flow to grow by 40% in the next 4 years as synergies are achieved. Management has indicated that it expects approximately $450 million of synergies to be created.

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15 Jun 2017

Issue 24 – Energy in The Dog House

Oil prices took a 4% nose dive on Wednesday after the bearish DOE inventory numbers were reported. The bears are definitely in the driver’s seat, and any bad news can ignite an aggressive sell-off in the commodity. The DOE U.S. Crude oil Inventories reported a draw of -1661k and the market was expecting a draw of -2300K. A 4% drop seems a bit aggressive. However, when sentiment is considerably negative, panic selling is not uncommon. A sell-off in the commodity leads to a sell-off in the E&P’s. We are quite selective in picking E&P stocks and ensure that specific criteria is met before inclusion into the funds. Discipline is especially important when there is negative sentiment in the sector and the underlying commodity is under stress.

Charles has been featured in the Growth Story Podcast by David Inzlicht. To listen, go to:
http://bit.ly/GrowthStoryPodcast

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08 Jun 2017

Issue 23 – Activity in Single Family Rental

The Palos Funds have been investing in US single family rentals (SFR) via Tricon Capital Group (TSX:TCN) for the past few years. On May 9, 2017, TCN completed its acquisition of Silver Bay Realty Trust Corp. The enterprise value of Silver Bay is approximately $1.4 billion. On June 05, 2017, Colony Starwood Homes (CSH) announced that they were buying a portfolio of 3,106 SFR for $815 million. After comparing the two portfolios acquired, we concluded that the TCN portfolio acquired was done at a higher discount. The CSA portfolio acquired has an implied gross yield of approximately 7.5% while that of the TCN portfolio is 9.0%. Our conviction is that the TCN acquisition has been further solidified by the substantial discount it was acquired at.

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01 Jun 2017

Issue 22 – Is the U.S. Economy Heading Towards a Recession?

A serious debate over incoming economic data and the Fed’s future interest rate decisions is brewing. On one side, some economists are warning that with unemployment below current estimates of full employment, additional rate hikes are needed to prevent a costly overshoot of inflation above the Fed’s two percent target. On the other side, economists are arguing that with inflation running below target, additional rate hikes could slow inflation further and restrain the economic expansion. Only time will tell which scenario will become reality. Nevertheless, a dispassionate discussion is warranted. The causal logic is that when the labor market gets tight and broad inflation causes cost pressures to exceed selling prices, the cost of money tends to increase faster than the return on capital, thus leading to profit reduction.

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25 May 2017

Issue 21 – Yes!!! BlackBerry!

Blackberry Ltd. (TSX:BB) is no longer a hardware company. It’s smartphone business is now being licensed and trademarked to companies that want to fabricate smartphones. Blackberry is now fully focusing on software services which can be broken down into 4 segments:

• Enterprise Mobility Management: BB is a leader in providing security systems to all devices that link together. The opportunity for BB in this segment is remarkable because the market is exploding.On average, 10 million new elements are added every day. In 2016, 3.9 billion smartphones and 6.4 billion connected elements were in use. Ericsson mobility believes this will grow to 6.1 billion smartphones and 20.8 billion connected ‘things’ by 2020.

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18 May 2017

Issue 20 – Will Stock Prices Hold?

The old age and the elevated valuation of stock market averages are causing concerns that the bull trend may be nearing its end and that a bad turn is imminent. While we recognize that skittishness can bring about market corrections when valuation metrics are ahead of themselves, secular bear trends are only firmly in place when recession risks are very high. Investors often misjudge what is going on. When the situation is too abstract, people tend to go along with the general consensus as it is socially acceptable and expected of them. These natural herd tendencies are psychological pro-cyclical behaviors that can often go too far, which increases the probability of being wrong.

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11 May 2017

Issue 19 – Hardwood Delivers (Part 2)

A few a weeks ago, we wrote about a company called Hardwoods Distribution Inc (TSX:HWD). HWD is North America’s largest wholesale distributor of architectural grade building products for the residential and industrial construction markets. The reason we have decided to do a follow-up piece on HWD is because it reported eye-popping quarterly results, which were well above ours and the street’s expectations. The company achieved a record revenue, profit, and EBITDA for the first quarter of 2017. We are very pleased with the results. We believe it is very important understand the attribution of the company`s performance. After digging into the financials, the big highlights are:

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04 May 2017

Issue 18 – Savaria Keeps on Buying

Savaria Corporation (TSX:SIS) designs, manufactures, and distributes equipment that facilitates the mobility of people with special needs. More information can be found on their website: https://www.savaria.com/products The North American demand for this kind of equipment is on the rise. The US and most G7 countries have growing aging populations and they are also seeing increases in disabilities among younger age groups as obesity continues to rise. We believe that SIS is well-positioned to meet the growing demand for mobility equipment. In the United States, one out of every five adults has some kind of disability. The Center for Disease Control and Prevention published a research report stating that the most common functional disability is a mobility limitation. This is defined as having serious difficulty walking or climbing stairs. We believe that SIS is well-positioned to help with this crisis.

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27 Apr 2017

Issue 17 – Trading Subscription Receipts

The Canadian market has a few large pending deals that have been financed by subscription receipts. This type of financing structure ensures the acquirer that it will have the cash it needs to complete the acquisition; the common stock is however only issued when the acquisition formally closes. When the deal closes, the subscription receipt gets converted into common stock. On the other hand, if the deal does not close, the subscription receipts will mature and investors will get their money back. This type of financing structure is very attractive for investors because it allows them to invest in a post-acquisition entity while eliminating the risk that the acquisition will not be completed.

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20 Apr 2017

Issue 16 – # Equitable Bank

A chicken keeper out of the US has been tweeting false news about Equitable Group Inc. (TSX:EQB). The chicken keeper made allegations that EQB’s Guaranteed Investment Certificates (GICs) were removed from the BMO and Scotiabank investor platforms. We made a few calls on Bay Street and quickly concluded that the above statement was false. EQB’s GICs are still being offered at BMO and Scotiabank. Despite the allegations being false, the market was spooked and all mortgage lenders quickly traded down.

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13 Apr 2017

Issue 15 – Boy O’Boyd

Boyd Group Income Fund (TSX:BYD-U) is one of the leading and largest operators of collision repairs in North America. It is the only public company in the North American automotive collision repair industry. Its revenue is recession resilient as 90% comes from insurance companies. Car accidents happen regardless of the state of the economy and insurance companies must pay the bill. Therefore, even in a recession, revenues are guaranteed.

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06 Apr 2017

Issue 14 – The Raging River Seesaw

For the last 48 hours, Raging River Exploration Inc (TSX:RRX) experienced severe volatility in its stock price. This volatility was driven by unsubstantiated news reports on the company. On April 5, 2017, Scott Deveau, an editorialist for Bloomberg, reported that RRX hired GMP FirstEnergy to explore a potential sale of the company. When the news hit the wire, the stock jumped 9%. We acted quickly and sold our position as the news wire did not make much sense.

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30 Mar 2017

Issue 13 – CanWel Building Materials 2.0

We had the chance to meet with CanWel’s (TSX:CWX) management team and was pleasantly surprised by the company and its future opportunities. CWX distributes building materials and is a provider of logging and wood-treatment services via 10 facilities in Canada and the United States. CWX has four divisions: 1. Building Materials 2. Treating Division 3. California Cascade 4. Forestry Products

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23 Mar 2017

Issue 12 – Flooding the Canyon

On March 22, 2017 Canyon Services Group Inc. (TSX:FRC) announced that it was being acquired by Trican Well Service Ltd (TSX:TCW). The combined operations of FRC and TCW will make it the leader in pressure pumping in Canada. The combined entity will have over 675k of hydraulic horsepower (HHP) which is approximately 35% of the Canadian fracing capacity.

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