Portfolio Update – July 2017

Despite the busy season at work, and the way it may seem based on my sparse posting here, this past quarter was an eventful one for my portfolio.

Callidus Capital Corp.

At one time, Callidus Capital was going to be taken private on June 30th. It did not happen. This was a small speculative position for me, but also one I was hoping I could use to park cash for the start of the summer. I first recommended it at $19.xx, and then averaged down with a whack of shares at $14.70. This enabled me to make a trade and sell at $15.50 for a small profit. I hold a few shares still as a purely speculative holding. Overall this was a disappointment, but I minimized the damage.

Diversified Royalty Corp. 

It really seems to me like money is freely available to anybody that needs it, and this means that relatively expensive royalty financing isn’t in very high demand right now. Below is an excerpt from Callidus Capital’s CEO Newton Glassman’s letter to shareholders:

During 2017, we have seen changes in the credit market to which we have and will continue to adapt. Capital is more plentiful, and therefore credit pricing generally is under downward pressure, albeit less so in our segment. For competitive reasons, we may lower interest rates, or alter credit features like term, or provide the option to pay a small portion of interest in-kind.

You may remember that DIV sold off one of their royalty streams, and was holding the cash while looking for a new royalty deal to sign. During this time however the dividend was not cut and the company was paying dividends out of the large cash pile in the hopes of finding a new royalty shortly. But looking at the lack of deals from Alaris and others, it seems like one could be waiting a long time before DIV makes another deal. In particular a high quality royalty. Each month the dividend is overpaid and no new royalty is signed, the company is worth less, and when I tried to do a valuation on what there is of the company, I found the stock overvalued. So I decided to slowly sell my position, and I am officially out of the stock now. I like the management team, so if the stock trades down below my fair value estimate of $2.40, I would have no problem buying again.

Integrated Asset Management

When I first bought IAM, I figured the stock should trade at $1.49 by the end of September. Nothing has changed to make me revise that target, and currently the stock is trading in a range of $1.40-$1.45. I am watching the price and looking to take advantage of prices at the bottom of the aforementioned range to build the position a bit larger. This has proven to be a sleepy little position, and I will happily buy more. The company has been investing a lot of money the past two quarters, which will contribute to recurring management fee revenue, and growing/consistent cashflow.

Enercare Inc.

Enercare has long been one of my favourite holdings. The rental business model allows for recurring, easily forecast-able cashflow, and management has shown they are good allocators of capital. The stock price was recently beaten up after  EBITDA dropped (due to the new Service Experts acquisition being a seasonal earner). I took advantage of this opportunity to add to my position at $18.70. The stock price has taken off above $20 again, so I’ve already made the easy money. If the price rises above $22, I may trim a bit, but I have every intention of Enercare remaining a large part of my portfolio.

Brookfield Asset Management

I’ve added a bit to my Brookfield position. It continues to remain my largest position by a lot.

Stella-Jones 

Not much new to report. I believe the share price is still too low, but there isn’t a catalyst in the near term. Once railway tie or utility pole sales increase again (as part of their normal cycles), Stella-Jones will likely continue to remain an attractive value.

Input Capital Corp. 

Input should be releasing their quarterly operations update on today or tomorrow, so we’ll have to see the numbers. The last update caused a 10% jump in the stock price, however the quarter which just passed included the time when farmers are busy planting and spraying, so it’s unlikely the capital deployment or number of streams signed will be an eye-catching surprise again.

Ergoresearch Ltd.

The newest position in my portfolio. Nothing has changed since I posted my thesis on the weekend, so you might as well just read that.

The rest of the portfolio remains fairly static. After the sales of Callidus and Diversified, I have reduced my leverage a bit. That isn’t a call on the markets, I jut haven’t gotten around to reinvesting all of the proceeds of those sales. I have a few stocks on my watchlist, and will write up something on the companies, once I’m done other important things such as actually investing in the stocks.

Ergoresearch Ltd. – Another Diamond in the Quebec Rough

If you have been so kind as to have read some of what I’ve written on this blog, you may remember that I had a chance to invest in a Quebec microcap trading at just two times earnings. Alas, for reasons I either can’t or don’t want to remember, I passed on buying PCI. If I had bought when I originally found the company, I’d be looking at almost a 300% return in under a year. If I had bought it when I had wrote about missing the opportunity, I’d still be looking at over a double.

I don’t intend to make the same mistake again.  Continue reading “Ergoresearch Ltd. – Another Diamond in the Quebec Rough”

What is Diversified Royalty Corp. Worth?

Diversified Royalty Corp. got their start in late 2014 by buying a royalty on the sales of Franworks restaurants, with the goal of acquiring a diverse portfolio of royalties from multi-location businesses across North America. Diversified was a misnomer until June of 2015, when the company acquired a royalty from Sutton Group Realty. And then in August of that year, the royalty for Mr. Lube Canada was acquired.

At that time the story seemed to be on track. Continue reading “What is Diversified Royalty Corp. Worth?”

Enercare Inc. – A Cheap Utility with Growth

Utilities have long been considered a safe haven in the stock market. Utility stocks generally pay out generous dividends, have predictable revenues, and the business is somewhat recession proof (people usually keep paying their hydro bill if they possibly can). These qualities and the reputation as a safe haven has led to the sector appreciating a lot, with many believing utilities could be overvalued.

Enercare Inc. (ECI) offers the best qualities of the utility sector, with the added benefits of growth and being undervalued right now.

enercare stock Continue reading “Enercare Inc. – A Cheap Utility with Growth”

Input Capital Update

Two months ago I wrote my thesis on Input Capital Corp, which essentially boils down to they are generating lots of cash but the business model seems to be misunderstood or otherwise not getting the full respect it deserves. Everyone seems to accept that mining streams are good models, and are safe ways to play precious metal prices. Far fewer seem to think that agricultural streams are a good way to play canola prices though. Continue reading “Input Capital Update”

Portfolio Update – April 2017

There’s been a lot going on in my portfolio, both with my transactions and news from the company’s themselves. And it’s given me the idea that it might be worthwhile writing up what’s been going on, a so called portfolio update.

This might become a regular thing, or it could be that the past couple weeks are the exception due to annual results and the like, so regular portfolio updates would be boring and unnecessary. Time will tell.

Sells

CLR

I ended up having to sell Clearwater Seafoods. It hurt because I still think that the company is going to grow well in the future and has very attractive business dynamics. This sale was not due to valuations or any problems with the company. But I saw that the thesis was going to take longer than that of another opportunity, and CLR was trading a few cents under my purchase price, so there weren’t any tax considerations to moving the capital elsewhere. The prudent move was to sell in order to buy another stock. Unfortunately these are the decisions you have to make when you’re fully invested or close to it.

Buys

IAM

Thanks to one reader to whom I’m very grateful, I recently became aware of Integrated Asset Management. In short, the company has raised a lot of money, but only receives revenue from it when it is invested. This has caused a situation where the company has not received the credit it deserves for the potential fees it will collect shortly. When I wrote my post on it, I came up with a target price of $1.49 by September 30th. In the 5 days since, it traded up to $1.47, and is currently sitting at $1.44. Luckily I got a small buy in at $1.33, but I would have preferred it stayed lower longer so I could accumulate more shares. The current price and dividend still offer a potential 7.6% return in five months, plus my prediction for a 22.8% return next year.

I think the big move up in the last month brings IAM closer to fair value, and an investor will still do well buying at these levels. However the big move up means I think there’s a better opportunity out there short term.

CBL

Callidus reported okay results for 2016. Revenue, earnings including unreported yield enhancements, loans receivable, and return on equity were all up. Meanwhile the leverage ratio was down over 10%, which should help reduce fears about investing in leveraged financial companies. The most important part of the release was this regarding the privatization process:

  • Based on the expressions of interest in the first stage, the Process has now moved to its second stage, with a more limited number of parties, which will not exceed six in number. Preliminary discussions with the smaller, second-stage group are focused on both structure and value.
  • Early expressions of interest support initial valuations that would translate into a price received by tendering shareholders that is consistent with the previously disclosed valuation range provided by National Bank Financial ($18 to $22 per share) that accompanied the SIB in April 2016

The process of taking Callidus private remains on track and schedule. Newton Glassman has tempered my expectations a bit, by narrowing the expected tender offer range to $18-$22, but with shares trading today at $17.76, CBL still represents a potential three month return of 3%-25% including the monthly dividend. I was too early at first, originally buying when I wrote my post at a bit over $19. But I added last week at $18. I consider this an excellent place to park cash short term. Worst case (or best case) scenario is you end up with a cheap lender doing everything they can to return money to shareholders and get to hold it longer term. This is a heads I win, tails you lose situation.

Lending Loop

I continue to deposit small amounts of money into my Lending Loop account. It’s pretty fun actually, and my account has a gross yield of 13.3% across a fairly diversified portfolio of loans. This should offer an after tax return of ~9.5% if all loans pay off. If I suffer some defaults I would still expect an after tax return over 6%-7%. This is a very small part of my portfolio, and I’m happy to sacrifice some marginal extra return for the fun of it and to support Canadian small businesses (both Lending Loop and the businesses to which I lend).

News

Now for some quick updates with the companies in my portfolio and about which I’ve written.

DIV

Steady as she goes here. Diversified Royalty Corp continues to have lots of cash and pay out more than it earns from royalties while they look for another royalty stream to purchase. The good news is that the Mr. Lube royalty continues to look incredible. Mr. Lube had same stores sales growth of 4.9% in 2016, and combined with the 2% effective SSSG of Sutton Group Realty Services, meant the DIV portfolio had a combined SSSG of 4.3% for the year. DIV is now out from under the Alberta cloud by selling their royalty stream from Franworks Restaurants. I believe that as soon as Diversified purchases another royalty stream the stock price should pop. Having sold Franworks, and the legal troubles of the old CEO behind them, the focus is now entirely on purchasing more royalties. Management’s current success should give anyone confidence that they’ll make an excellent investment.

BCE

My investment in BCE continues to bore me, and I love it. BCE raised their dividend 5.1%, while free cash flow increased 7.6%. Bell Let’s Talk was another huge success. BCE under performed the TSX and TSX telecoms index in 2016, but the real test of Bell’s inclusion in the portfolio will come during a market downturn. Until such a time, it will be a small holding I pay next to no attention to while I DRIP the very generous dividends it pays out.

DC.PR.D

These Dundee preferred shares remain undervalued. It’s not as attractive as it was under $9 at the start of 2016, but there’s still the 8% dividend while you wait for the price to reflect the safety of the preferred. This Globe & Mail article states there’s still some room to run for preferred shares, but investors may have to dig deeper for the best values. If they dig deep enough, they’ll find DC.PR.D and the price should rise. Even trading up to a 7% yield, which is still among the highest of preferred shares on the market, would lead to a share price of $16.22.

The Dundee business itself is terrible (but undervalued!), but still make plenty of cash to pay the dividend on the preferreds.

BAM.A

By far my largest holding. Funds from operations increased by 27.7%, but shares trade at just 11.5x P/FFO right now. Fee bearing capital increased over 16% continuing a trend of strong growth with no sign of stopping. Brookfield is constantly in the news for aking large purchases and investments. As long as Bruce Flatt is CEO, and probably for long after that even, I plan to never sell a share and continue to buy when I see a dip.

BBU

I hold this based on the returns of the other Brookfield spinoffs. BAM.A has an incentive for BBU to perform well, and every other spinoff has performed excellently. That said I can’t speak to it’s valuation here. It acquired a water utility in Brazil and a road fuel provider in the UK. This one will depend smart acquisitions, which I trust will continue.

BPY.UN

Remains undervalued. Pays a 4% yield with a 82% payout ratio, and the distribution was increased 5.4%. Has some of the highest quality real estate all around the world. Funds from operations increased 15% YOY, and BPY.UN currently trades at 16.8x P/FFO. NAV is somewhere north of $37, so shares trade at a deep discount to book value despite the high quality management and assets.

ECI

Enercare has kept growing, just like normal. But ECI had a big pop recently because investors got outside confirmation of a takeout valuation. One of Enercare’s peers, Reliance Home Comfort, was purchased by Victor Li for $2.8 billion. TD estimates that if Enercare were bought out at a similar EV/EBITDA valuation it would garner a purchase price of $29-$32 per share. I however hope Enercare continues to operate independently for years, growing the share price and dividend indefinitely.

SJ

Stella-Jones is still a great company temporarily beaten down by short term weakness in their core businesses. Stella-Jones will overcome this, possibly making accretive investments of companies with weaker balance sheets, and shares will be much higher in the future. Stella-Jones is a stronger company than Clearwater, and is a much bigger position for me, so it is very unlikely I ever sell it to fund a different stock purchase, even if I think SJ may not move much in the short term.

Stocks I didn’t buy but should have

  • Park Lawn Corp was $16.63 when I wrote about them one month ago. Then their full year results came out and revenue more than doubled and net earnings per share increased 83%. It now sits at $17.50.
  • Perlite Canada was 25 cents when I wrote about it three weeks ago. Then they reported revenues up 27% and a profit in Q1, big improvements over the first quarter of their record 2016. Shares are now at 34.5 cents. I wrote the damn article saying I should have trusts my gut the first time I studied PCI. Then I used my stupid head and thought good results couldn’t push the stock much past 30 cents. Lesson learned – I’m an idiot.

Conclusion

The first two months of this blog have been pretty eventful for my portfolio, and writing my research unfortunately publicizes my poor decisions like passing on Perlite Canada and Park Lawn Corp. But my portfolio remains strong and I’m happy with my holdings after some minor shuffling and investing into some good opportunities like Integrated Asset Management.

Integrated Asset Management – A Tiny Brookfield?

Anybody who takes a look at my portfolio will see I’m a huge fan of Brookfield Asset Management. I’m a big believer in Bruce Flatt and know that I want him responsible for a lot of my portfolio’s returns. But BAM.A is huge. I salivate at the thought of having invested back when it was Brascan. Integrated Asset Management may give me a chance to turn back the clock so to speak.

Integrated Asset MAnagement
From iamgroup.ca

Integrated Asset Management (IAM) is an alternative asset manager for institutions and private clients, just like Brookfield. Where Brookfield focuses on private equity, real estate, infrastructure, and renewable energy; IAM focuses on private debt, real estate, and infrastructure.  Continue reading “Integrated Asset Management – A Tiny Brookfield?”

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”