It’s been 2 years since the financial crisis of 2008 and a large number of so called blue-chip equities have yet to regain the levels reached prior to the crisis. On aggregate, Canadian equities remain about 20% below their pre-meltdown high while U.S. markets are still roughly 30% below their peaks. Given the large number of investors, institutional and retail alike, that were caught offside by the crisis of 2008, writer John Daly set out to compile a list of companies that generated consistent profits every year regardless of the economic climate. To take his screening criteria one step further, the companies he found traded below the traditional value investor’s price/earnings (P/E) ratio threshold of 20 and their share prices have risen beyond their pre-crisis highs.
Daly’s research unearthed 10 companies that were profiled in the October (2010) issue of Report on Business magazine in an article entitled “10 gems for the value investor“. The 10 companies happen to be:
- Alliance Grain Traders (AGT:TSX)
- Bonterra Energy Corp. (BNE:TSX)
- Laurentian Bank of Canada (LB:TSX)
- Exchange Income Fund (EIF:TSX)
- High Liner Foods (HLF:TSX)
- Grande Cache Coal (GCE:TSX)
- Lassonde Industries (LAS:TSX)
- Home Capital Group (HCG:TSX)
- BMTC Group (GBT.A:TSX)
- Pacific Northern Gas (PNG:TSX)
Given the opportunity to send Mr. Daly a few questions about the article, we jumped at the chance and the result of that interaction has been transcribed for you below. Enjoy and check out Mr. Daly’s piece in the magazine if you haven’t already (link to article in paragraph above).
Biography: John Daly has been a Senior Editor at Report on Business magazine at The Globe and Mail since 1998. Prior to that he was a business writer and editor with Maclean’s magazine, Global Strategy Financial Inc. and AOL Canada.
Q: Did you notice any common traits or themes in the 10 companies you highlighted (be it in terms of other valuation metrics or the attitude of management etc?
A: I’d done similar versions of this story in 2006 and 2008. In those versions and this one, the initial criteria and metrics were somewhat loose. We were looking for promising value companies that were smaller than, say, the 50 familiar corporate giants that usually top the ROB magazine’s annual Top 1000 ranking of Canadian companies by profit. Broadly speaking, we wanted P/E ratios below 20 (much lower, in some sectors), fairly substantial revenue (say, more than $100 million), growth in revenue and/or earnings over the past few years, and – for this year’s version – a share price that had held up or increased beyond its pre-2008 peaks.
For the sake of reader interest, we actually sought out unglamorous businesses, and companies based outside Toronto. Lots of companies do business in the rest of Canada, apparently.
As for common traits, the one that jumped out at me in just about every one of this year’s 10 companies is that management has found a niche or a twist to provide added value in a commodity business or a traditional industry. Look at this year’s companies by sector – pulse crops, banking, oil and gas, air transport, fish, coal, mortgage lending, discount furniture and electronics, fruit juice and natural gas transport.
Q: If one believes in efficient market hypothesis, then the multiples/valuations of these companies are likely trading at what they are worth – why do you seem to think that these particular companies will outshine others?
A: As Steve Martin once said, I wouldn’t believe in anything if it wasn’t for my lucky astrology mood watch.
That and Warren Buffett’s Rule No. 1: Don’t lose money. Rule No. 2: See Rule No. 1.
More seriously, the low multiples/valuations of the companies gave me some confidence that they aren’t overvalued. As to why they’re so low, in many cases, I think all the available information about the companies may not have been absorbed by the market. So, the market may be undervaluing their growth prospects.
Q: In speaking with the management of these companies, I’m sure you got some sense of the current economic/business out there. What is the current environment like? Is management hopeful for the future? What is their outlook? Are they spending to grow their business?
A: The mood varied. The Al-Katib brothers at Alliance Grain Traders were the most optimistic – and given their phenomenal growth over the past few years, I think that’s justified. The folks at High Liner were probably the most guarded, although still hopeful.
Over all, I’d say that managers are uncertain about the next few years. But they figure that if they can stay focused on their unique strengths and market segments, they’ll do well even if the economy struggles. Many, like High Liner, which is carefully expanding its U.S. businesses, are also looking to grow geographically.
Q: Were there any other companies that you found during your research that were near/close in comparison to the 10 you mentioned but didn’t quite make the list – if so which one’s were they?
A: There were a handful of serious contenders that we cut fairly late, and they were chopped for somewhat arbitrary journalistic reasons: One company we liked didn’t want to be interviewed or allow us to take photos. Another, Canlan Ice Sports (ICE:TSX), which operates ice rinks, looked interesting, but its revenues were a little low, and its shares a little too thinly traded, for our comfort. And our art department thought an ice rink would look kind of boring. Another strong contender was Genworth MI Canada (MIC:TSX-V), but we already had a company in the mortgage business: Home Capital Group (HCG:TSX).
Thank You, Mr. Daly!