Lists & Rankings

Investor 500: The year of the stock picker

Six fund managers reveal what Investor 500 companies they think will do well and, most important, make you money.

stock_picker

CN Rail expects its freight volumes to increase 10% this year as the economy recovers. Photo: CN Rail

The stock-pickers:

Martin Hubbes, EVP, chief investment officer, AGF Investments
Kim Shannon, president, chief investment officer, Sionna Investment Managers
Barry Schwartz, VP, Baskin Financial
Tim Caulfield, VP, Canadian equities, Bissett Asset Management
Vijay Viswanathan, associate portfolio manager, Mawer Investment Management
David Burrows, president and chief investment officer, Barometer Capital Management

Astral Media

TSX: ACM.A
MARKET CAP: $2 billion
P/E: 11.4

While most media outlets had a tough 2009, Montreal-based Astral Media raised its consolidated revenues by 5%. Not an easy feat for a company that owns radio and television stations, billboards, garbage can advertising and other outdoor media. Still, this year’s looking a whole lot better; with auto companies spending money again, its recent Q2 net earnings were up 24%. Its consistency has a lot to do with the Greenberg family and the company’s CEO, Ian Greenberg. “They’re the largest shareholders, so they have to run a tight ship,” says Schwartz. He’s confident the share price will rise as more companies start advertising again. “There are many opportunities for the price to return to historic levels,” he says. (BS)

Bankers Petroleum

TSX: BNK
MARKET CAP: $2.1 billion
P/E: –

Burrows is a big fan of Calgary-based Bankers Petroleum for one main reason: growth. Currently, the company extracts 9,500 barrels of oil per day (bpd) – all from Albania – but it’s expected it’ll finish the year at 15,000 bpd. That will jump to about 24,000 bpd by the end of 2011. “They’ve got some very good targets that are considered low-risk and good upside,” says the investment manager. He also likes the company’s balance sheet, which has an undrawn credit line of about $110 million. With the increase in oil prices, the stock price has jumped, to $8.50 in mid-April from about $1.60 in early July, but that could soar if its new thermal steaming technology, now in a trial phase, works and lowers extraction costs. (DB)

Brookfield Asset Management

TSX: BAM.A
MARKET CAP: $14.9 billion
P/E: 36.2

Despite all the troubles in the real estate market over the past three years, Toronto-based Brookfield Asset Management is a favourite of Viswanathan and Caufield. Its focus is commercial real estate, renewable energy and infrastructure assets, and it has more than $100 million in assets under management. The company owns a lot of its assets, but also manages money for other clients, which provides a steady revenue stream through ongoing fees. Viswanathan likes the company because of its strong management team and history of buying wealth-creating assets that generate a lot of cash flow. Caufield’s keen on the valuations. Investors have “grossly” misunderstood the company during the recession, he says. (VV, TC)

Celestica Inc.

TSX: CLS
MARKET CAP: $2.5 billion
P/E: 19.9

If you like the mobile market but don’t want to get into the cellphone wars, then Celestica may be the company for you. One of the main components of the Toronto-based tech business is developing the handsets that people around the world use. While Research In Motion is its biggest client, the company also does business with Motorola, Palm and non-wireless companies like Sony and Hewlett-Packard. Three years ago, new management took over and set out to dump its unprofitable businesses. That resulted in lower revenues – from $8.5 billion in 2005 to $6.8 billion in 2009. But, Burrows says, Celestica’s EBITDA margins are growing. With RIM still going strong and the smartphone market still in its infancy, Celestica should see strong growth in the next couple of years. (DB)

Cineplex Galaxy

TSX: CGX.UN
MARKET CAP: $1.2 billion
P/E: 20.7

If you want a slice of the entertainment industry pie, consider Cineplex Galaxy. With more than 132 theatres and 1,300 screens, the company controls about 70% of the Canadian movie theatre marketplace. Add in popcorn sales, pre-movie advertising, video game areas and myriad restaurants and you can see why the company posted a 37.6% increase in Q4 2009. But the movie industry is dying, right? Nope. In 2009, U.S. and Canadian ticket sales were around US$10 billion, a record. “It’s a steady-Eddie business,” Viswanathan says. “It’s not going to hit anything out of the park.” He says it’s closer to the higher valuation range, but with a strong long-term outlook and a 6% yield, it’s still a good company to own. (VV, DB)

CN Rail

TSX: CNR
MARKET CAP: $29.1 billion
P/E: 19

“I love talking about CN Rail,” says an excited Caufield. “It’s a fantastic business – probably one of the best businesses we own.” That’s high praise for a mode of transportation that doesn’t seem to get much attention these days. But people need to ship goods across North America and, according to the fund manager, there’s no one better than this Montreal company to do it. He’s especially keen on the firm’s management, which has been able to keep costs under control. While it did see some setbacks over the past couple of years, mostly due to low volumes, it’s expected its rail cars will become increasingly packed over the months and years ahead. CN is predicting a 10% rise in volumes. (TC)

Constellation Software

TSX: CSU
MARKET CAP: $959 million
P/E: 15.1

Think about this for a second: pretty much every enterprise in the world uses some type of software to operate its business. Now imagine holding a company that makes those programs. That’s what Constellation Software does. The Toronto tech business makes critical software for public transit authorities, private clubs, school administrations and amusement parks, among other businesses. Viswanathan likes its business model, and it’s not hard to see why – it sells a one-time license and then collects recurring revenue from maintenance and software upgrades. Best of all, it is not competing with the big boys like Oracle and SAP. “They’re under the radar and finding niches where those guys don’t want to compete,” says Viswanathan. The company is growing at 15% to 20% a year. (VV)

Crescent Point Energy

TSX: CPG
MARKET CAP: $8.3 billion
P/E: –

When Finance Minister Jim Flaherty announced the government would start taxing income trusts in 2011, many investors fled the asset class. Too bad; if they held on to strong companies like Calgary’s Crescent Point Energy, their portfolios may be in better shape. In July of last year, the oil and gas trust converted to a corporation and didn’t cut its dividend. “They still pay out just under 100% of cash flow,” says Burrows. He explains that because of the company’s horizontal drilling and fracking technologies, it can generate three dollars for every dollar it spends. Burrows admits this company is pricey, “but the best is expensive,” he says, adding that the tax pools it created as a trust means it can avoid paying taxes for a few more years. (DB)

EnCana Corp.

TSX: ECA
MARKET CAP: $23.9 billion
P/E: 17.9

The big news for Calgary natural gas producer EnCana, besides the gas glut brought on by a recession-induced demand dip and new shale production, was the spinoff of its oil assets into Cenovus Energy. The split, says Shannon, means the company is now smaller and more able to focus on cash flows and growth. She especially likes the valuation – 12 times trailing earnings for “one of the best natural gas plays in North America.” The company’s price-to-book ratio is 1.43 and it has a 2.54% yield, which is good for a resource company. EnCana has also said it plans to double production over the next five years, and with the price of natural gas inevitably increasing from current lows, it is poised to make money. Plus, says Shannon, with great cash flow, it has almost no financial risk. (KS)

Ensign Energy Services

TSX: ESI
MARKET CAP: $2.3 billion
P/E: 17.9

Ensign should not be doing as well as it is. The Calgary oilfield services company is in an industry that’s “enormously volatile,” says Shannon. But, unlike many of its competitors, it’s never lost money. “They’re the gold standard,” says the investment manager. Net income did fall dramatically during the economic downturn – it was down 52% in 2009. To stay above water, management has had to act conservatively, keeping debt low. Its debt-to-equity is 0.11, and price-to-book value is 1.4, a historical low. Because investors are still concerned about the natural gas sector, it’s a cheap buy, trading at 10 times normalized earnings. Shannon’s excited about the company’s future potential: “When natural gas prices come back, it will still be cheap,” she says. (KS)

Fortis Inc.

TSX: FTS
MARKET CAP: $5 billion
P/E: 19.9

For some investors, there’s nothing better than a company that increases its dividends. That’s why Schwartz likes Fortis, a St. John’s-based energy distribution utility – the company has increased its dividend every year for the past 37 years. “If you bought the company 30 years ago, you’d have a 75% dividend yield increase,” says the portfolio manager. It sustains those payouts by investing in strong projects. It’s expected to spend more than a billion dollars on things like building a liquefied natural gas storage facility, spending money on automated meters and increasing its hydro facilities in Belize. Management has also said it hopes to make some U.S. acquisitions. With consistent 5% to 8% annual earnings growth, and that increasing dividend, Schwartz says this is a great bet. (BS)

IESI-BFC Ltd.

TSX: BIN
MARKET CAP: $1.4 billion
P/E: 28.6

If there’s one constant in investing, it’s that hardship often begets opportunity. When BFI Canada announced in 2008 that it would convert from an income trust into a corporation and cut its distribution by 73%, shareholders sold the stock en masse. But it’s possible the waste management company shouldn’t have been a trust in the first place; it is growth-oriented, so it made sense that it would want to reinvest profits for acquisitions. In November, BFI bought Waste Services, a Burlington, Ont., solid waste services company, for $370 million in stock. The company hopes it will see around $30 million in cost synergies in the next two years. Even if the renamed IESI-BFC puts its buying on hold, it would still be a strong company – even in a downturn people take out the trash. (DB)

MacDonald Dettwiler

TSX: MDA
MARKET CAP: $1.5 billion
P/E: 13.8

Vancouver-based MacDonald, Dettwiler & Associates provides information solutions to, as it says on its website, “market sectors which offer strong repeat business potential,” like the financial services, real estate and surveillance and intelligence sectors. It also has space-related businesses like developing the Canadarm, satellite systems and other advanced robotics. Caufield’s most bullish on the space side of the business, saying that the company “has been winning an increasing amount of business and generating extremely impressive cash flows.” With subscriptions accounting for 90% of revenue, and a backlog of work that will keep the company busy for the next few years, MDA is poised to make even more money over the coming year. (TC)

Magna International

TSX: MG.A
MARKET CAP: $7.1 billion
P/E: –

After GM’s and Chrysler’s bankruptcies last year, the auto industry had to bounce back. This year looks like a better one for everyone in the sector, including Aurora, Ont., auto parts maker Magna International. Burrows likes the company because it has a dominant market position, a strong balance sheet and because, during the recession, auto parts companies such as Cadence Innovation and Meridian Automotive Systems “were pushed into the company’s hands,” he says. The big news of 2009, though, was Magna’s failed bid to purchase Opel, a subsidiary of GM. When the deal fell through, the stock price tumbled and is only now recovering. At $64, it’s well below its 2007 price of around $95. Burrows likes its broad customer base, clean balance sheet and desire to acquire. (DB)

Manulife Financial

TSX: MFC
MARKET CAP: $35.6 billion
P/E: 25

The recession was rocky for Manulife Financial. The life insurer was hit hard after it failed to hedge its variable annuity businesses and capital levels shrank. Confidence in the company was damaged, and Dominic D’Alessandro, the CEO who turned Manulife into a giant, left the business. Yet our panel thinks this is a great stock to own. “You’re getting a world-class franchise at book value,” says Schwartz. Viswanthan points out that the company is in a business that’s been making money for decades, if not centuries. The new management, led by CEO Don Guloien, “has been making sure the balance sheet is in good shape,” says Hubbes, adding that the company has built up capital reserves. Manulife had to cut its dividend – it’s 2.6% now – but Hubbes thinks that will grow as the company regains its footing. (VV, MH, BS)

Methanex

TSX: MX
MARKET CAP: $2.4 billion
P/E: 631.5

Sometimes it’s better to own a company that serves the energy sector rather than invest in an operation that’s directly tied to its ups and downs. That’s how Methanex positions itself. The Vancouver-based company makes methanol – a chemical that’s used in antifreeze and NutraSweet – from natural gas. The alcohol product is used as a fuel additive in China, which means the more people buy cars, the more this Canadian company will benefit. The company is expanding, opening a plant in Egypt later this year. Its one drawback is that methanol is banned as a fuel additive in North America – there’s some concern that the chemical has polluted groundwater supplies – but Schwartz isn’t worried. “It’s going to be the fuel of the future,” he says. (BS, KS)

Metro

TSX: MRU.A
MARKET CAP: $4.6 billion
P/E: 12.8

Recession or no recession, people need to eat. That’s why Metro, the Montreal-based grocery store chain, is one of Hubbes’s top stock picks. The company has done well over the past couple of years, posting record net earnings in Q1 of 2009 and then beating them by 21% this past January. Metro also increased its dividend by 23.6% in the last quarter. While the stock price is around $41 – up from a low of $21 in February 2008 – it’s still a good value. “Everyone’s watching the Loblaws turnaround,” says Hubbes, “so they forget about Metro.” Investors may have missed the cost-cutting moves that’ll make the business more competitive in the coming months, like rebranding its stores – which until recently had different names – under the Metro banner. “It’s cheaper to run one brand across the country,” says Hubbes. (MH)

National Bank Financial

TSX: NA
MARKET CAP: $10.1 billion
P/E: 10.8

When most Canadians think of banks they think of the big ones – TD, BMO, RBC, Scotiabank and CIBC. But it’s the smaller players that may offer the best value, says Schwartz. According to Schwartz, National Bank in particular is the cheapest on a valuation basis, with the stock trading at a 20% discount from the big banks. Its lower valuation may have something to do with the asset-backed commercial paper problems it had at the end of 2008. The bank owned $2.2 billion in ABCP, but Schwartz explains that National dealt with the issue quickly, and its balance sheet is now clean. A strong housing market – National Bank is heavily involved in the mortgage sector – and a stronger economy will also keep this company in the black. (BS)

Penn West Energy Trust

TSX: PWT.UN
MARKET CAP: $9.2 billion
P/E: –

Penn West Energy Trust is one of the country’s largest conventional energy trusts, producing 180,000 barrels of oil equivalent a day. Viswanathan likes the company because of its large land positions in Western Canada’s tighter oil spots, like the Pembina and Dodsland, located in central Alberta and western Saskatchewan, respectively. Viswanathan says the company’s recovery rate – the amount of oil it pulls out of the ground – is 10%, but with advances in technology, it’s likely that will increase to 15% or 20%. That hasn’t been priced in, so if you buy now, and the company grows as it should, the stock price will increase. It also offers investors a whopping 8.5% yield. (VV)

Rogers Communications and Telus Corp.

TSX: RCI.B // T
MARKET CAP: $20.3 b (Rogers); $11.8 b (Telus)
P/E: 13.1 (Rogers); 11.2 (Telus)

When it comes to the wireless industry, it’s a toss-up; Caulfield likes Rogers and Telus. Both companies have significant exposure to the wireless space, more than the other big mobile carrier, Bell Canada, and that could mean big bucks as Canada’s wireless landscape develops. It’s a competitive business, though, and with new entrants like Wind Mobile and Craig Wireless, some people think this sector should be avoided. “There are very polarized views on Canada’s telecom space right now,” says the fund manager. Caulfield thinks more competition will help Rogers and Telus. Canada’s wireless customer base has grown slowly compared to other developed nations, but with more options, more people may jump into the cellphone market. “There are risks,” adds Caufield, “but the risks are more than discounted in the current share price.” (TC)

Saputo Inc.

TSX: SAP
MARKET CAP: $6.2 billion
P/E: 17.5

In good times or bad, people always buy cheese. That’s one reason why Montreal’s Saputo, Canada’s biggest cheese and dairy product producer, saw its Q3 profits (ending Dec. 31, 2009) rise by 80%. The company also likes to acquire – it bought Neilson Dairy from George Weston in late 2008, making the company an even bigger player in the milk market. While Schawrtz likes the Neilson deal, he’s most excited about the management, led by Lino Saputo Jr. “It’s got the best management of any Canadian company,” he says. The company is a defensive play – it’s not going to grow dramatically, says Schwartz – but thanks to the strong dollar, Saputo’s team could look to the U.S. for some cheap buys. (BS)

Shoppers Drug Mart

TSX: SC
MARKET CAP: $9.5 billion
P/E: 16.2

Things haven’t been looking so hot for Shoppers Drug Mart lately. In April, the Ontario government announced it was cutting the price of generic drugs and removing professional allowances – a fee the drugmakers pay to pharmacies – resulting in about $1 billion of lost funding. In one day the stock price dropped by 11.6%. But bad news means good buys, especially for this still-strong, growth-oriented drugstore chain. Both Hubbes and Shannon like the company, and even though it will experience a temporary setback, there are still plenty of mom-and-pop stores to buy, and the company continues to turn aging Shoppers stores into more profitable total convenience centres. “Earnings will continue to grow and the stock price will rise,” says Hubbes. He also expects the dividend, which is at 90cents per share per year, will increase. (MH, KS)

Thompson Reuters

TSX: TRI
MARKET CAP: $30.6 billion
P/E: 27.5

With media companies scratching their heads over how to make money in the Internet era, it’s no surprise that investors are concerned about the sector’s future. But people shouldn’t be too worried about Thompson Reuters. Caulfield points out that the company has undergone a significant transformation over the past decade, selling its newspaper and travel businesses and most importantly buying Reuters in 2007 for US$17.2 billion. Its earnings have been depressed by restructuring costs, but in the next year or two the synergies the newswire provides will start flowing through to the bottom line. Its fortunes will also improve as sales of its products pick up, post-recession. If you take into account the true earnings power, Caulfield says, it’s actually cheap. (TC)

Toromont Industries

TSX: TIH
MARKET CAP: $2.3 billion
P/E: 16

There’s one surefire way to know if a company’s got potential: it buys during a downturn. That’s what Toromont Industries did, purchasing Enerflex Systems Income Fund for $597 million in October 2009. “It highlights what I like about them,” says Hubbes. “They make acquisitions when times are bad, when it’s cheap.” The company’s main attraction though is its two businesses – its chain of Caterpillar dealerships in Eastern Canada and its energy services operations in Western Canada. The former operation involves selling equipment, which is cyclical, and servicing long-term contracts, which is more consistent. Its energy business involves supplying compression equipment for natural gas and infrastructure projects. It also helps that it pays a 2% dividend. (MH)