Perlite Canada – PCI

I love running stock screeners, which is even more proof of how fun I am. You get to find investments with the exact metrics you want. Want to find a company trading at 6.2x P/E, with a market cap between $550 million and $585 million, and debt/equity of less than 1? You can find it. Then you can do the rest of the research to find if it will also make a good investment. Continue reading “Perlite Canada – PCI”

How to Invest in Death: Park Lawn Corp (PLC)

There are three sure things in life: death, taxes, and insert joke inclusion here. Really there’s only two sure things. There aren’t any great ways to invest in taxes (get a government job?), but there is a way to invest in death. That’s to own a cemetery. Continue reading “How to Invest in Death: Park Lawn Corp (PLC)”

Clearwater Seafoods: CLR

One of the better pieces of investing advice out there is to “buy what you know”. It basically boils down to: if you use a product/shop at a store/ use a service, and are very happy with it, it’s likely that others do too. If many people are happy with a company’s offerings, that company very well could make a good investment.

The problem in Canada is that there aren’t many publicly traded companies that you likely deal with in your real, not internet, life. You probably deal with one of the big banks (TD, RY, BMO, BNS, CM, NA), shop at one of the big grocery chains (L, EMP), buy gas at a gas station (if you look them up you’ll find these belong to SU, IMO, HSE, PKI, ATD), shop at one of the few publicly traded Canadian stores (CTC, DOL), buy your coffee at Tim’s (QSR), and maybe eat at some of the restaurants (AW.UN, PZA.UN, BPF.UN, IRG). I firmly believe that it’s at least partly the scarcity of consumer stocks out there that have led to the success and growth of the aforementioned stocks. If a mutual fund wants to invest in things people know, there aren’t many companies to choose from, so of course they’re going to pick Canadian Tire and Restaurant Brands International.

There just aren’t many household names on the TSX. It’s unlikely if you know whether your car parts come from Magna (MG) or Exco (XTC). It’s unlikely if you know whether the stuff you buy is shipped on CN rails or CP. It’s unlikely you know if the roads you drive on were built by Aecon (ARE) or were planned by Stantec (STN). When you go to the grocery store, it’s unlikely that you pick up many items which you can then go home and invest in. The best you can do is look somewhere on it and hope you’re supporting Canadian farmers or workers. But there are a few hiding in there, like a mischievous child wanting to scare their parents.

One of those is Clearwater Seafoods. Perhaps you don’t eat a lot of shellfish, so you might not know about this company. They are one of the largest seafood companies in North America, and are considered a vertically integrated producer. They harvest the oceans for the shellfish (lobster, scallops, clams, whelk, snow crab, masago, langoustine), process it in plants or on the vessels, store it and then deliver the final product out. The are a large player in the seafood game.

And there’s a lot to know about the seafood game once you start digging.

The first important thing to know is that now just anybody can fish these things. Regulations put in place require companies to have a license before they can fish for a sell certain species, so holding these licenses is very valuable. For instance, Clearwater is the only company in Canada that can sell wild caught Arctic surf clam. They have almost half of the licenses for sea scallops and Argentine scallops. Other areas of the world use similar license/quota systems, so acquisitions can be very important. In 2015 CLR acquired MacDuff Shellfish, which if you can’t tell is an extremely Scottish shellfish company. This acquisition allows Clearwater more licenses, and licenses in species they previously were unable to harvest and sell.

The second important thing to know is that sustainable fishing is a very serous business. One of the things that attracted me to Clearwater was their commitment to sustainability was evident. It’s constantly talked about by management and in their investor presentations and reports. While every company will talk about this (go look at a lumber company’s  investor presentation), almost every press release and investment by the company had a rationale of increasing the sustainability of their operation. Anything Clearwater puts out publicly is riddled with the word sustainable. That is becoming more and more important with knowledgeable consumers in today’s world.

Now onto some numbers. The real fun stuff!

invest in clearwater
From TMX

As you can see, the past 5 years have been pretty good to shareholders, but right now you can buy shares for the same price as you could in late 2014, despite a lot of growth in the underlying business.

This is a very volatile stock in the best of times. After I bought it was not uncommon to see swings of 3 or 4% regardless of the movement of the broader market. So when I looked at the beta on Clearwater I was not surprised to see it’s -0.11, or next to no correlation with the market. But there is one stock Clearwater does correlate with: High Liner Foods (HLF), the other big seafood stock in Canada.

These tend to trade in sympathy, despite having different niches within the same sector. For those unfamiliar with the company, High Liner is company whose products are mainly the delicious breaded variety of fish. Unfortunately, these kinds of foods are falling quickly out of flavour. The kids are switching to the more natural foods. No breading, little to no seasoning, the healthier fatty fishes as opposed to sole or tilapia.

I had to do that flavour/favour joke. It was practically impossible not to.

High Liner reported earnings on February 22nd, and they were bad. Sales of those breaded products were down more. High Liner is diversifying into healthier fishes, and sales are growing there, but it wan’t enough to offset the breaded declines. This trend has been going on for a while.

But those problems don’t apply to Clearwater. In spite of being very different companies, the sentiments of one extend to the other. The results in the last two years have been the stocks trading very closely.

From TMX

You can see that, especially in the last 6 months, the stocks have moved together. This is despite very different results and valuations. After the third quarter of 2016, HLF reported a 3.9% decline in sales year over year., CLR reported an increase of 31%. HLF reported an increase in adjusted EBITDA of 4.9%, mostly due to lower costs of their raw materials (raw materials is quite literal in the seafood business). CLR reported an increase in adjusted EBITDA of 30%. Clearwater will be anouncing their fourth quarter of and full year 2016 results shortly, but they should be/almost have to be better than High Liner’s.

Now one is obviously in a better position than the other, but a better company isn’t always a better investment. HLF is a classic value stock. Over at Financial Uproar is a very good write-up on the thesis for High Liner Foods. It trades a a very low P/FCF, and is very profitable, despite the dropping sales, which management expects to continue in 2017.

Clearwater meanwhile, can’t be described as a value stock at these levels. It would need to be put in the growth at a reasonable price. It’s trading at a P/E of 24x. Because of a huge increase in working capital (mostly an increase in inventories), Clearwater actually had negative operating cash flow for the first nine months of 2016. They’ve harvested most of their quotas already so inventories will decline in the fourth quarter and should have a positive effect on profitability and cash flow. So you can view it as they can’t sell all that they harvest, or you can view it as they can harvest so much they can’t sell it all. I view it as the latter, but I could be very wrong.

I think that Clearwater offers a chance to invest in the consumer sector of Canada with a publicly traded Canadian company, in a niche that is growing and should continue to, with favourable regulations giving them a virtual monopoly. It’s a stock that is completely uncorrelated from the broad market. And right now the market is not giving Clearwater full credit for their growth opportunities and investments in growth. But don’t consider Clearwater for a value stock.

Disclosure: Long CLR

Callidus Capital Corp: CBL

In yet another example of “loaning money to Canadians or Canadian companies isn’t a real business and making money that way doesn’t count”, we have Callidus Capital. Now, to be fair, this is how Callidus explains their business:

 Callidus Capital Corporation is a Canadian company that specializes in innovative and creative financing solutions for companies that are unable to obtain adequate financing from conventional lending institutions. Unlike conventional lending institutions who demand a long list of covenants and make credit decisions based on cash flow and projections, Callidus credit facilities have few, if any, covenants and are based on the value of the borrower’s assets, its enterprise value and borrowing needs.

It is tough to read that and not immediately think “We loan to oil and gas companies in the middle of Fort McMurray with no regard to how much money they make. All we care about is that they own some land and they have a need to borrow money”. But since their IPO, Callidus has proven there’s a market for their financing. And at the moment Callidus is pretty cheap, and have a catalyst on the horizon for which I don’t think the stock is getting enough credit.

From TMX

Let’s start with the traditional metrics of valuation. Callidus is trading at 14.3x P/E. The closest they have to peers would be Chesswood Group (17.4x) or ECN Capital (15.4x). They trade at 1.9x P/B.

But those cheap numbers come with a caveat ass well. Something called yield enhancements. When Callidus makes a loan, they negotiate returns over and above the interest rate of the loan. Callidus often acquires warrants or options in the companies to which they loan. In the 2016 Q3 earnings release COO David Reese said the following about the yield enhancements:

We also added $23.1 million in yield enhancements which will contribute to future earnings, an increase of 40% in one quarter.  Failing to recognize yield enhancements booked, runs the risk of transferring value from current to future shareholders, due to technical and timing issues.  This quarter’s recognition of yield enhancements demonstrates it is a fundamental part of the business, just like provisions are, they are basically the opposite sides of the same restructuring coin, but can result in significant mismatching of timing in income recognition.

So they acquired warrants/options/derivatives of $23.1 million in the quarter, adding significant value to the company, but it’s tough to predict when these yield enhancements will provide earnings to benefit shareholders. I think these yield enhancements are misunderstood (possibly a failing on the company’s part). Yield enhancements on the balance sheet are internally valued at $80.6 million, and after 9 months in 2016 had contributed $38.1 million of income. But accounting rules dictate when these incomes can be realized, hence the COO’s fear that the value the company is adding now may only benefit future shareholders (since the market is discounting the yield enhancements now).

After that long aside, let’s continue with the valuation and what management has been doing. Through the first 9 months of 2016, Callidus had a return on equity (ROE) of 17.5%, an improvement over the same period in 2015, and an admirable number. ROE can be “gamed” by adding debt, but Callidus actually decreased their leverage from 2015 to 2016, and are operating with a leverage ratio of 40.3% (down from 52.8%). Debt decreased by $69 million in the 9 months ended September 30, 2016.

Speaking of debt pay down, let’s talk about the shareholder yield of Callidus.

Shareholder Yield

Shareholder yield can be defined as all the money used by the company to directly benefit shareholders. This excellent Meb Faber podcast goes in depth on the subject. Most people will look at the dividend yield of a stock. But share buybacks also benefit shareholders, by increasing their stake in the company. Paying down debt doesn’t always get included, but paying down debt definitely benefits the shareholders, so we’ll include it here.

So Callidus paid down $69 million of debt in 9 months. Let’s be conservative and assume they didn’t pay down any debt in Q4, since we do not have the numbers. Callidus had 49,354,355 shares (fully diluted) outstanding at the start of 2016. This means they paid down $1.40 of debt per share, at current prices that’s a “debt payment yield”, yes I think I made that up, of 7.4%.

Callidus also right now has a dividend yield, which I did not make up, of 6.33%. They payout $1.20 as a dividend. This has been initiated and increased by management in a desperate effort to get the market to realize the value of the company. This Bloomberg article goes into the various ways the CEO has tried to fight off short sellers and increase the stock price.

The last component of shareholder yield is share buybacks. Callidus had a substantial issuer bid in place during 2016. Under this SIB they purchased and cancelled 2,849,604 shares, all of which bought at $16.50/share. This means they used another $0.95/share to benefit shareholders, a buyback yield of 5%. Callidus recently annouced that they have a normal course issuer bid in place now as well, meaning they are likely to continue buying back shares. They view shares as very undervalued, which I agree with, so this is a prudent use of more capital.

The total shareholder yield of Callidus is 18.7%. In 2016, Callidus returned almost one fifth of their current share price to shareholders. If I had to guess, I’d say that this shareholder friendly use of capital is at least part of the reason the stock has doubled in the past year.

The Catalyst

Now for the catalyst that is being rewarded, but probably not as much as it should be. Privatization.

In that Bloomberg link further up, you’ll read that one of the levers management is pulling to realize value is looking into taking the company private. On September 30, 2016, Callidus announced they were going to look for advisors for the process of privatizing. On Halloween they announced that they had appointed Goldman Sachs as the advisor for this process, and that they expected the process to be complete by the end of Q2 2017. Valentine’s day they announced that they had signed 17 companies to NDA’s, and that the process was still on schedule to be done by the end of Q2.

Callidus is far down the road of going private, and they seem fully committed to it. In April 2016 they publicized that they had received a formal valuation from National Bank that estimated the fair value of shares was between $18 and $22. And since then almost all financial stocks have rallied, so I’d have to guess that the fair value has increased as well. CEO Newton Glassman has a great name, and suggests the company should be valued at 1.8x the loan book. The loan book has grown since the article in that link, and 1.8x the outstanding loans would be over $43/share. That is unlikely considering where shares trade now, around $19.

I truly believe that management is engaged in the privatization talks to maximize shareholder value. Glassman’s private equity fund Catalyst Capital Group, and various funds offered by Catalyst, own 67% of Callidus. It would have been very easy for Catalyst to offer to take Callidus private alone at $16.50 (shares traded under $10 in early 2016). They could have offered $20 and took the company private. But Catalyst has insisted on taking Callidus private with a partner. This benefits them by valuing their shares higher, but also will benefit all shareholders, by maximizing what us peasant shareholders will get for our shares. Their motives of course are not purely altruistic, but they seem to be working in the best interest of shareholders. Glassman if anything has proven himself willing to fight for Callidus to be valued fairly.

Fair value is somewhere between $19 and $43.85 though. Even if Callidus got valued at 1x the loan book, that would be $24.36. A 1x valuation of the loan book seems very low, but it would still serve as a 28% premium to Friday’s close. The deal is still expected to close by the end of June, so buying shares now would offer an annualized return somewhere around 100% at a buyout price of $24.36.

Since an annualized return of 100% seems too good to be true, let’s go with a worst case scenario of only receiving $20/share as an offer. Annualized this return would still be over 15%.

Risk of Deal Falling Through

There obviously is the risk that nothing comes of these discussions to take the company private, or they are at least delayed past the expected Q2 close. This would likely lead to a collapse of the share price, since at least some holders are counting on this privatization. But there’s no reason to believe management would cease the process of taking the company private. It would simply extend the thesis out a year or however long it would take.

Then again, you could be left with a company growing its loans outstanding, has a 6% dividend (at these prices, so it could be even higher if shares plummet) which is well covered, has “hidden” value in the form of the yield enhancements, and a management team that is hellbent on maximizing value for shareholders. There are worse things to hold.

All of those good things said – in the interest of giving you the full picture – Callidus is currently involved in several lawsuits, claiming they preyed on companies who didn’t fully understand the terms of their financing. Callidus has sued back, and say they have precedent from other cases saying a positive outcome is likely. I don’t view these as that serious, but I am definitely not a lawyer.

Conclusion

Let’s wrap this thing up.

Callidus Capital is a growing distressed lender, an industry that hasn’t been getting much love in Canada. They currently trade at a cheap valuation, with a 6+% dividend. They are trying to be taken private before the second quarter ends, which if it’s successful should provide a return of at least 15% annualized and a visible end game. But if the catalyst doesn’t come to be, you’ll hold a cheap, growing company making tonnes of money and sharing that money with you by buying back shares and paying a generous dividend.

Disclosure: I have no position in Callidus Capital, but intend to purchase a shares within 72 hours.

Stella-Jones: SJ-T

This is a company in a boring industry (utility poles and rail ties while moving into other lumber segments recently), but this boring company has simply crushed expectations and the market for years. Look at the chart below.

invest in stella-jones
From TMX

It’s that top right corner of the chart that has caught my interest. That part where this beautiful 45 degree line stops going directly up and to the right. The reason that this is really interesting is because this is the chart for the share price obviously, but the revenue, net income, and dividend charts have continues up and to the right. Eventually the above chart will continue up as well.

stella-jones income
From Stella Jones 2015 Annual Report

From 2011 to the year ended 2015 assets have increased almost 300%, as has shareholders equity. They’ve grown revenue from $640 million to $1.559 billion. Earnings per share rose from $0.87 to $2.04. The dividend has risen from $0.13 to $0.40 today.

The most recent earnings release showed net income rise another 16%, debt reduced by $92 million in the quarter, and sales in their newer residential lumber division increased over 100%.

Shares have been mostly flat and because of this can be bought for a very fair P/E of 17. When a company is growing by 16% per year that’s an excellent multiple. That’s a PEG of 1.07x for a company with lots of potential acquisitions out there, breaking into a new market (residential), and having enviable organic growth of approximately 6%.

From what I can see shares have not risen due to slightly lower sales in the rail tie and utility pole divisions, which are what people associate with SJ. In the 3rd quarter tie sales were down by 7% and utility poles down by 6.2%. This could look disconcerting, and obviously has the market worried, but growth in the other divisions is encouraging and even in a down quarter sales still increased by 18% to a record $512 million. And the purchase of railway ties and utility poles can only be put off so long, so this decrease now may persist for a couple quarters but will surely reverse.

stella-jones products
From Stella Jones Q3 2016 Investor Fact Sheet

The stock was absolutely punished for announcing preliminary results, telling investors that sales and income in the fourth quarter will be down. It presented a tremendous buying opportunity as shares dropped to around $38. Shares have since recovered to over $41, but that’s still far closer to the 52 week low than the 52 week high.

Stella Jones still shows strong organic growth but most importantly, management has shown they are great at accretive acquisitions and this should remain a strong driver of growth for the stock. Utility pole sales will not stay depressed. Railway tie sales will not stay depressed. If for some reason these two segments of their business do remain under pressure, that should present the company opportunities for acquisitions at a discount. Residential lumber sales are going to increase organically, and is where it seems the company is focusing on growing.

This is a fantastic company and I kick myself every day, as I looked at this company 5 years ago and in my naivety didn’t want to pay over 20x P/E. I know I’ll be very happy holding this stock long term, both by the share price growing and the dividend continuing to rise. I feel it’s often overlooked by retail investors because of the boring industry but there is nothing boring about the returns it has delivered.

Disclosure: Long SJ.

Input Capital Corp: INP

Input Capital has a pretty simple business model. They pay farmers a certain amount of money up front, and then they get paid back in canola. A typical deal might be paying a farmer $240/MT of canola up front, and then paying them another $86 upon delivery. This means Input is buying canola for around $326/MT and selling it for much higher. They’ve realized average prices around $480, and the current canola price is ~$520. Input is essentially buying $5 bills for $3.20.

The mining industry has been using this business model – known as streaming – for years, but Input is the first agricultural streaming company. The companies best known for this are Franco Nevada and Silver Wheaton. You can look up the charts of those stocks for the viability of the model. And Input actually has some advantages: they get paid within one year of paying out their money (compared to many years later for mines), and they are able to place mortgages on the farms so they will get paid back in equipment or land should the farmer not be able to pay. This security has been tested by 3 deals falling through, but Input has been compensated almost the full amount, showing the downside to their deals is protected. At the time of this writing Input has collected ~$13 million of $18 million.

There is one risk you might notice – the price of canola. For the most part this is mitigated. Input is able to negotiate better prices than farmers due to their size, so their price is always $10-20 higher than what’s in the news. Second, canola prices drop typically when yields are high. This means that when prices are low Input will have more tonnes to sell and volume should overcome some downside risk. And vice versa – when yields are low and Input might not receive as many tonnes, the price will be high and they can make lots of money on less canola.

The balance sheet is a fortress with no debt and around $20 million in cash. They have “dry powder” of around $100 million (cash, cash flow, and an unused credit facility) in this fiscal year to make new deals, with a goal of deploying $50 million. In just over 3 years they’ve grown from 10 “streams” to 122 as of this January. Input also just initiated a dividend, so it pays out a 2% yield, in case you need to be paid to wait for the growth. They trade around 6x free cash flow, which is 20% of what the large mining streamers even though their business model might be even better. I believe this discount comes from a misunderstanding of the model, and simply because they are opening a new market so people are hesitant to see if it works. Canola they “own” at this moment is worth $1.44/share, plus cash of ~$.25/share, makes book value about $1.69, and INP is trading at $1.85. Very cheap considering the growth runway they have.

input capital cash flow

input capital growth

Management includes a former deputy minister of agricultural, a Canadian Agricultural Hall of Famer (it’s a thing, I checked, and I’m pretty sure just checking it’s a thing made me a member too), a director for both Alaris Royalty and Sandstorm Gold (a successful mining streamer). The CEO and CFO founded a farmland fund which had compounded returns of 19% before being bought by the Canadian Pension Plan Investment Board. Management has proven to be very successful, and own over 22% of shares, so their interests are aligned with the shareholders.

assiniboia farmland

Input is a successful company with no immediate competitors, a proven business model, downside protection, a large pool of farmers to grow with, competent management, is trading cheap when looking at book value, cash flow, and mining streamers. Shares have traded over $3 recently, and the company has become stronger and proved its business and security model since so there is no reason INP can’t be $3 by the end of 2017 if management can deploy as much capital as they plan to.

invest in canola

Consider INP if you’re interested in a company which can grow its share price greatly, while also paying a sustainable yield with lots of room to grow. This company is just at the start of its story.

Disclosure: Long INP

All images from Input Capital’s most recent investor presentation.

The First One

Hello, I’m sure you are waiting to find out what this is. Here we go!

I’ll start with a little about me. By day, I’m just a mild mannered man who spends a lot of time thinking about stocks. By night however, I’m a mild mannered man who thinks even more about stocks. Contrary to popular opinion, this makes me both fun and mysterious, trust me.  I love thinking about any and all of the following: P/E’s of 3, management teams that own a lot of stock in their company and buy back lots of stock, Bruce Flatt, The Intelligent Investor, Joel Greenblatt, the funny sounding term GARP,  turn around stories, free cash flow, etc. Told you I was fun.

As part of this thinking, I often write down my thoughts about the stocks I research. I also do a lot of searching out ideas for new stocks to research. And during the course of looking for new ideas I noticed there are very few sites offering up ideas for a Canadian investor like me. My habit of writing my thoughts on stocks and the lack of Canadian investing blogs (Divestor and Financial Uproar are all that’s really out there, and they’re both great) made me think it’s a hell of idea for me to start an investing blog.

I will be writing about stocks I believe are undervalued, overvalued, and everywhere in between. Hopefully this blog becomes a place you, the dashing reader, can come to find investment ideas, or learn a bit about how to analyze stocks. If you close this window having learned anything about investing I will consider it a success.