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.

3 thoughts on “Portfolio Update – April 2017”

  1. Not sure how you can describe the CBL Q4/’16 #s as anything but bad…ROE was -49.2% for the Q and basically 0 for the year. they didn’t originate a new loan all year and took $134MM of provisions – not sure how you think loans are higher. and who knows how much of the book is accrued interest and fees versus…1/3rd of their loan collateralization is “enterprise value”…so they are an asset based lender who lends 100c on the dollar for 80c of hard assets…maybe you should read that National Bank valuation report…the $18-$22/share is based on net loans of $1.7B (vs. $817MM actual at Dec. 31)…wonder what it’d be based on today’s loan book…

    not saying someone won’t come in and pay $18-$22/share, but if they don’t, how many more tricks can management pull out of its hat to support the share price?

    1. Thanks for the insight. We’re viewing loan loss provisions differently, which is how we’re calculating ROE, earnings, differently. I also used gross loans receivable before derecognition when I said loans receivable are up – I’ll admit that I should have stated that more clearly. And management was pretty clear that not originating any new loans was an effect of this process to “pull tricks out of their hat” to raise the share price. In this release Glassman states that Callidus is excited to get back into a growth phase of their business. Maybe you think this isn’t true, but I completely understand them not securing any new loans.

      I’ve read the National Bank valuation, and know what went into the range given. The below sentence helps confirm my confidence in the buyout range. You can argue that the valuation was made in different circumstances, but the NCIB and management expressing that the tender price will be between $18-$22 is more current and accurate in my opinion.

      “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”

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