Full episode: Market Call for Monday, July 17, 2017
Brendan Caldwell, president, CEO and CIO of Caldwell Investment Management
Focus: Canadian value stocks
We have performed very well for our investors and owe much of this to our focused investment strategy, which helps us avoid painful losses and participate in areas of strength. Looking forward, we see increasing value in a focused strategy as slowing growth rates in almost every sector and geography in the world will make it very difficult to perform well using a passive, market index or quasi-index strategy.
Celestica is one of the largest suppliers of electronic manufactured services (EMS). They provide original-equipment manufacturers across several industries with outsourced manufacturing and supply-chain solutions.
We like Celestica for the following reasons:
- Return to growth: They have now had five straight quarters of topline growth (6.5 per cent average). Good long-term organic growth prospects in diversified/industrials, particularly in aerospace as we are in the early innings of companies like Honeywell (which CLS has a partnership with) outsourcing EMS. They also have a good outlook in communications for at least the next year as they are benefitting from data-centre expansion/upgrades. Furthermore, they have invested in their front office (added new leadership to help drive diversification strategy) which has borne some fruit and should continue to help grow sales.
- Margin expansion: They have had progress here in recent quarters and have suggested this will grind higher over time through mixed benefits as they grow their diversified/industrials segment.
- M&A potential: They plan to be more acquisitive in the back half of 2017 and are looking at a number of areas (EMS, other components, vertical integration).
- Attractive valuation: They trade at a substantial discount to the market and also trade at a discount to peers. We think this has historically been due to the perception of a lack of pricing power/commoditized product offering. However, Celestica has become more ingrained in the design process and provides a major value-add service to OEMs given how much money they save by outsourcing. We believe this discount will narrow over time.
SunOpta is a leading provider of organic and non-GMO consumer food and ingredients in North America. Customers include Kirkalnd (Costco’s private label), McDonalds, Loblaw, Gerber, Cliff Bars, Frito Lay, Blue Diamond (nuts), Hain Celestial (tea) and Chobani (yogurt).
We like SunOpta for the following reasons:
- New results-driven team: Despite having strong products, SunOpta had struggled operationally in the past, which led to cost overruns, product recalls, and ultimately customer losses. The Board conducted a strategic review of the business, which resulted in Oaktree Capital taking a 12 per cent position in the company in mid-2016. A new CEO who recently led a similar turnaround story at another food company has since come on board and laid out a value creation plan to drive shareholder value (including $30 million in cost improvements). He has brought on several new additions to the senior management team to help execute on this plan.
- Growing end markets: There has been a strong shift in consumer tastes toward more wholesome, natural foods and ingredients. The organic food category has significantly outgrown the overall food industry in recent years and, given its low penetration rate, the strong demand for organic products should continue.
- Market share gains: The new management’s team’s initial priority is to improve operations with a focus on customers getting what they want. A new go-to-market approach is another area of focus that has already generated business wins with existing and new customers in existing and new product categories. A particular area of focus is on creating private-label products for grocery stores, quick service restaurants, and other customers.
- Industry-leading supply chain: The supply of organic farms is limited and maintaining the integrity of the organic ingredients supply chain is very difficult. Over the last 30 years, SunOpta has built the largest organic sourcing platform in the world and now sources ingredients from 65 countries. It has direct, long-standing relationships with organic farmers and often helps with the certification process. (for their Consumer Products segment). SunOpta’s industry-leading supply chain is a key competitive advantage that will help it drive market share gains over time.
Martinrea is a Tier One auto supplier that supplies parts to major auto OEMs (original equipment manufacturers). Segments include: a) Fluid Management (engineering/production of products to store and transport fluids); b) Metal forming (body/chassis systems, engine blocks, transmissions); c) Aluminum products (same type of products as metal forming but made with lightweight aluminum).
We like Martinrea for the following reasons:
- Strong position in lightweighting: Regulations are driving better fuel efficiency, which is often achieved through the "lightweighting" of vehicles by using higher strength-to-weight metals like aluminum/stainless steel. We are in the early innings of this trend and MRE is well-positioned here.
- Margin improvements: MRE have executed well on improving margins and expect to continue improvements over the next few years. Drivers of the margin improvement are: Better pricing/mix benefits (more discipline on pricing and shift to higher-margin light-weight aluminum); normalization of costs following the launch of new facilities; better capacity utilization (new facilities being put to work); and more efficient operations.
- Attractive valuation: MRE, like many autos, trades at a substantial discount to the index and we believe the "peak auto fear" is the primary driver (other reasons: Electrification of cars, autonomous cars and Trump potentially changing NAFTA). Furthermore, MRE trades at a further discount to their auto supplier pear group, despite better projected growth. We believe there is a good probability that their multiple gets re-rated upwards.
PAST PICKS: APRIL 8, 2016
CGI GROUP (GIBa.TO)
- Then: $62.15
- Now: $66.10
- Return: +6.35%
- TR: +6.35%
ZCL COMPOSITES (ZCL.TO)
- Then: $7.65
- Now: $13.73
- Return: +79.32%
- TR: +95.93%
IMVESCOR RESTAURANT GROUP (IRG.TO)
- Then: $2.75
- Now: $3.53
- Return: +28.36%
- TR: +32.96%
TOTAL RETURN AVERAGE: +45.08%
FUND PROFILE: CALDWELL CANADIAN VALUE MOMENTUM FUND
PERFORMANCE AS OF JUNE 30, 2017:
- 1 month: Fund 0.0%, Index* -0.8%
- 1 year: Fund 17.1%, Index* 11.0%
- 5 years: Fund 14.4%, Index* 8.7%
* Index: S&P/TSX Composite Total Return Index
TOP HOLDINGS AND WEIGHTINGS
- BRP: 6.0%
- Ag Growth: 5.2%
- Calian Group: 5.2%
- Transcontinental: 5.1%
- SunOpta: 5.0%