Top picks from the pros
1| Metro (TSX: MRU)
Market cap: $6.2 bil | P/E: 12.9
Dupont has owned this Montreal-based grocery chain for nearly five years. Why? Among his top reasons is the compounded 21% per year that it’s returned ever since Pierre Lessard, former CEO and president and now chairman of the board, took over the company in 1990. Dupont also likes its franchise model, because whatever capital is needed to open a new store is the franchisee’s responsibility. Metro gets a percentage of sales from every location, so it generates a lot of free cash flow, which it then returns to shareholders in the form of 1.53% yield and share buybacks. “It’s basically a royalty company,” says Dupont. Expect about 10% bottom-line growth.
2| Shoppers Drug Mart (TSX: SC)
Market cap: $9 bil | P/E: 15.1
A good reason to own this Toronto-based drugstore chain is that it’s a great demographics play. “People are getting older, and they’re willing to pay for medication,” says Dupont. He thinks the company will offer more paid services to older Canadians too. “Pharmacists are taking more of the overall health-care pie,” he says. Of course, Shoppers has got other things going for it, like being the most pervasive drugstore in the country. This was a great value buy a few years ago when provincial governments were pressuring the chain to lower generic drug prices. Its price-to-earnings multiple is higher today, but it’s still “a solid holding,” he says.
3| Open Text (TSX: OTC)
Market cap: $3.3 bil | P/E: 23.8
Waterloo, Ont.–based Open Text develops software that helps large companies organize data. It’s involved in numerous sectors, including automotive, education, health care and packaged goods. The main appeal here is that Open Text’s revenues are recurring. Customers pay for software and then incur a regular fee to use it. Right now its top-line growth is “anemic,” says Dupont; in Q2, revenues increased by 9.5% over the year before, which is much lower than the 20% year-over-year revenues it posted in 2012. Due to these issues, it’s trading at a 30% discount on an EV/EBITDA basis to its Canadian peers, but Dupont is confident its problems will be resolved.
Dupont’s Funds: Fidelity Canadian Large Cap Fund
10-year annualized return 12.8%
TOP 5 HOLDINGS
Shoppers Drug Mart: 6.9%
Fairfax Financial Holdings: 4.3%
Fidelity Monthly Income Series
6.8% 5-year annualized return
$7.4 Billion Assets under management