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A View From Here November 2014

November 20, 2014 • Print This Article

"If we become increasingly humble about how little we know, we may be more eager to search" Sir John Templeton

Earnings, Valuation & Conviction

Over the past month or so we have seen earnings releases from most of our investment holdings. Except for one position, which remains earnings challenged (but thankfully small), the results have been excellent, with each company reporting continued strength in their underlying business. While we have another two key earnings releases in the month ahead, I remain optimistic that the portfolio of investments we have been building is beginning to bear fruit. For the past several months, we have seen consolidation in the value of many of these holdings as we used excess cash in our accounts to 'scale-in' further commitment.

Ultimately, it is earnings that will pave the way for how an investment is valued which is mixed in a bucket with the markets perception of how it will perform in the future. We look to be invested in companies outside of popular themes (such as natural resources, metals and China) so our incubation period is often longer and more boring (for lack of a better term) because it is lost on the general market participants until a change in perception begins to capture imaginations. An example of how this occurs is to look at successful outcomes from existing names and how their valuation moved higher following a period of almost no attention whatsoever. FirstService, Easyhome and Methanex are prime examples of how this occurs. They remain relatively stoic until the market notices...and in my experience - it always notices. We just don't know when.

Since last year, we have been replanting seeds as we wound out of what I believed to be investments that had reached a valuation maturity and refocused in pockets where I believe there is value to be had. The challenge in this scenario is that we don't have a defined period of time as to when value gets recognized (but hope it is within a 18 -36 month period). This also gives us ample time to deepen our investment conviction, watch corporate developments and look under rocks to see if what we might be (or not be) missing.

What gives me enthusiasm for our names is just how well the underlying businesses are performing relative to our investment thesis and reduced (or maybe non-existent) market expectations. As this has occurred we continue to build the positions and it appears to me at this moment that many of these investments are poised for a very strong future.

One example has been Domtar, where they remain a steep discount to their peers (over 40% by my calculation*). The company has reported two back-to-back earnings releases that challenge this discount. Further, the industry is considering changes to their corporate structure, which might enhance the return sooner than expected. We have been very active in building this position since early 2013 and would welcome a re-valuation of the industry that has been out of favor for some time. And while we wait we are receiving a pretty attractive dividend.

Another name that has brought some interest has been our Glentel position, which reported earnings that far exceeded both the previous year and all analyst expectations. This company is so low-key (does not promote themselves or hold investor calls), that it does not generate much interest and management and related parties own almost 47% of the shares (and have recently been adding to their holdings). It seems that investors are awaking to the potential earnings growth that has been sucked out of the valuation for the past year. We have used that weakness to build what I believe could be a very rewarding investment. And as with Domtar, Glentel pays a attractive dividend while we wait.

Lastly, Leon's reported a 1% increase in same store sales and record third quarter earnings. This was a nice surprise and I believe that this long-term holding will bear significant growth for us over the long-term. Further enhancement may occur from the successful cost-savings and synergies developed from the their takeover of The Brick in March 2013. This is the type of company I can see us owning for a very long time. And as we wait...its paying us a pretty good dividend.

As you can see, I feel a wave of deep optimism for the actions we have been taking over the past 18 months... and I hope to be right because as you know - I own the very same investments for myself and my family.

Thanks for taking a look and as always...

All Good Things,

*based on a calculation of similar paper,packaging and container board companies that would make up a peer group. For more information of the companies that I use to calculate this disparity, please feel free to reach out and I would be happy to share my findings.

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des ├ępargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

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