GOOD STOCKS HARDER TO FIND
Portfolio manager sees opportunities in ‘volatility’
Other than during the Brexit shock of last summer, North American equities have basically gone straight up since the latter part of February 2016.
That’s made it difficult to find attractive opportunities at cheap prices in Canada and elsewhere, not only for value investors like Ian Hardacre, chief investment officer at Empire Life.
The portfolio manager, who oversees about $15 billion in total assets including the $1.8 billion Empire Life Dividend Growth fund, is a bit cautious these days, with higher-than-normal cash weightings in some of his other portfolios.
But the Dividend Growth fund is close to fully invested, as Hardacre has managed to find situations where the market is ignoring a certain aspect of a company.
He also looks for scenarios where the market is punishing a company too hard in the short term, or investors simply don’t have the patience to live with a strategy that may take a few years to be executed.
“Valuations are generally high, and bad news is somewhat ignored,” Hardacre said. “I think we’re headed for periods of volatility, and periods of volatility are good for us because it provides opportunities.”
The Dividend Growth fund holds approximately 45 names, and has representation in every sector, based on individual companies’ bottom-up characteristics.
Energy is a marginal overweight, as the sector has had a slow start since the beginning of 2017, but Hardacre is optimistic that oil and gas stocks, along with pipeline and midstream companies, will do well.
“The supply and demand fundamentals are coming more into line, as OPEC continues to restrain production,” he said.
The fund also has a weighting in financials of nearly 30 per cent, as Hardacre continues to view Canadian banks as good long-term investments for a dividend portfolio.
“I don’t see anything on the horizon that is going to disrupt the Canadian banks’ business,” he said.
But there are a few names that really fit the bill for what Hardacre is looking for in an investment: high-quality companies that are out of favour and can compound over time, which is difficult given the large number of cyclical names in the Canadian market. One of those opportunities is Shaw Communications Inc. (SJR.B/TSX), which encountered some weakness after selling its older media assets to Corus Entertainment Inc., and purchasing Wind Mobile, which has since been renamed Freedom Mobile.
“In the short term, people didn’t like it because they basically sold free cash flow for more of a growth asset,” Hardacre said. “They need a wireless property if they are going to compete longer term, and that will take a lot of capital, but now they have the ability to compete against other providers, particularly Telus Corp. in Western Canada.
“We think it is the right longterm move for the company,” he added.
Hardacre has investments in other Canadian telecom companies, as he believes the management behind the Big Four incumbents are very strong. However, they didn’t offer the same sort of opportunity Shaw did, where an investor could take a contrarian opinion, and take advantage of the fact that many others focus more on the next quarter or two.
Similarly, there were some doubts about whether MacDonald Dettwiler & Associates Ltd. (MDA/TSX) made a wise move with its recent $3 billion acquisition of DigitalGlobe Inc., and if it paid the right price.
Hardacre has owned MacDonald Dettwiler for more than a decade, and considers the largest satellite producer in the world Canada’s best technology company.
However, orders came in lower than expected in 2016, which put pressure on the stock along with the DigitalGlobe deal.
“The company has a new CEO, and their goal is to get more U.S. government business, so obviously this gets them on that road,” Hardacre said, noting that DigitalGlobe’s main customer is the U.S. government. “We believe in the merger of the two companies, and if we’re right, the stock will be a lot higher in the next two years.”
Another company Hardacre has owned for more than a decade is convenience store operator Alimentation Couche Tard Inc. (ATD.B/TSX).
“It is one of the greatest success stories in the Canadian market, as they operate the business very well,” he said. “The management team is one of the best in Canada, and the valuation is quite acceptable, given how fast we think the company can grow.”
Hardacre highlighted the expected closing of Couche Tard’s acquisition of smaller U.S. rival CST Brands Inc., which should be accretive to earnings.
But more importantly, he still thinks there is a good growth runway around the globe.
“There are still parts of the world they are not in, and there are still consolidation opportunities going forward,” Hardacre said. “Some people are skeptical (and believe) the opportunities for consolidation and acquisitions are not very good, but we disagree.”
He also noted that Couche Tard has very high free-cashflow conversion, so when the company purchases an asset with debt, they can pay it down very quickly.
I don’t see anything on the horizon that is going to disrupt the Canadian banks’ business.