04 Oct 2016

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Canadian Portfolio – Transactions details

04 Oct 2016

Yesterday, October 3rd, we proceeded to our quarterly review of the Canadian model portfolio. A total of 6 transactions, 3 buys and 3 sells, were executed. You will find below the explanations for each of them.

Sells:

Ritchie Brothers (RBA) – MarketTrend: Reduced weighting of the industrials sector, which went from 15% (4 positions) to 13% (3 positions). We had to sell one of our four holdings: RBA, CAE, CNR, or RCH. RBA and RCH were the two with the lowest SPscores within the group, at 61%. We decided to sell RBA (5.3%) given its slightly lower return on capital, its higher both compared to its intrinsic value and future growth value (FGV), and because of the downward intrinsic value trend while the stock price jumped.

CI Financial (CIX) – SPscore: Replacement of CI Financial (CIX) (2.3%). We are always looking for opportunities to increase our portfolio’s quality, and this explains why we decided to replace CIX by CM. Despite its still high SPscore, CIX is starting to show weaknesses on a few important indicators: the intrinsic value hasn’t increased since December 2014, it’s in fact decreasing. The NOPAT also decreased in the last 12 months, so did the EVA and revenues. Knowing that most of CIX’s revenues come from the mutual fund industry, which his facing and will continue to face major headwinds, we can’t assume this decreasing economic performance is only temporary.

Cogeco Communications (CCA) – SPscore: Replacement of Cogeco Communications (CCA) (3.8%). Cogeco’s return on capital decreased a lot and is now of only 5.9%, well below the 10% that we’re looking for. If the return on capital continues to decrease in the next quarter or if the cost of capital increases slightly, Cogeco could quickly end up generating negative EVA, which we want to avoid.

Buys:

North West (NWC) – MarketTrend: Increased weighting of the consumer staples sector, which went from 9% (2 positions) to 10% (3 positions). The 5 companies with the best SPscores within the sector are Jean Coutu (PJC.A), Metro (MRU), Lassonde (LAS.A), Alimentation Couche-Tard (ATD.B) and North West (NWC). We cannot buy Jean Coutu, partly because its return on capital is too low at 9.1%. Lassonde does have everything we ask for, but the stock is illiquid. Since we already own MRU and ATD.B, we decided to add North West (NWC).

Canadian Imperial Bank (CM) – SPscore: To replace CIX, we added Canadian Imperial Bank (CM), ranked #2 in the financials sector in Canada with an SPscore of 73%. CM is the Canadian bank showing the best indicators right now, with an accelerating intrinsic value growth, EVA growth, and strong revenue growth.

Enercare (ECI) – SPscore: To replace Cogeco, we added Enercare (ECI), one of the best options available in the consumer discretionary sector. MTY Food Group (MTY) could have also been a good option, but we decided to buy ECI which is more undervalued, more liquid and in full growth mode.

Each new position was added to our portfolio with a weighting close to 4%.

If you have any question, don’t hesitate to get in touch.

Jean-Didier

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