What Our Clients Are Asking

We’ve highlighted three questions that came from our audience last month at our Annual Client Presentations that we feel may be of interest to our readers.

1.  Given the recent volatility in markets, have you made any recent changes in the portfolios?

The tremendous run-up in the share prices of U.S. technology stocks meant that by early 2018 our holdings in this area had become too large a proportion of our equity holdings. While we remained confident that our stocks still exhibited prospects and valuations validating our continued investment, we trimmed our holdings in this area to maintain a more prudent exposure to the group. While we had trimmed these stocks to what we would consider to still be “full” positions, their continued outperformance throughout the first half of 2018, meant that they, once again, regained their outsized status in the portfolios and we trimmed again, as a matter of discipline. With the proceeds from these trims, along with regular dividend and interest income that flows into the portfolios, we were on the lookout for stocks which we felt satisfied our quality, and “growth at a reasonable price” criteria. As a result, earlier this year, we initiated positions in both General Motors and Magna. We feel that these two companies have each undergone dramatic transitions that position them well for the disruptive forces in the personal transportation space. At the time of their purchase, both GM and Magna traded at significantly more attractive yields and price-earnings valuations than the tech stocks that we trimmed but continue to hold.

With respect to fixed income holdings in the portfolio, we have been anticipating higher interest rates for some time. As a result, the duration of our bond holdings, at 3.9 years, is significantly shorter than that of the Canadian Universe Bond Index, which is at 7.4 years. As our bonds trend towards maturity, we will be able to re-invest at higher rates. As well, our bond holdings are all investment grade and have a safer credit rating profile than the benchmark.

2.  What’s next for cannabis stocks?

As we have often stated in the past, while cannabis companies in Canada are exhibiting spectacular growth in their businesses and revenues, they do not currently meet our investment criteria when it comes to profitability, cash flow, seasoned management teams and, notably, valuations. We acknowledge that the industry is here to stay. But it is difficult to pick out the individual winners and losers as companies face continued and growing competition, intellectual property threats and branding challenges. At this early stage, we are unable to know whether, well down the road, the cannabis industry will resemble the global beer and spirits industry, where various economies of scale favour its largest players, or if it will more closely resemble the wine industry, which is very fragmented, and not that profitable. As with any investment opportunity, we will monitor the cannabis industry as it evolves. But we cannot justify involvement in any of the companies at this early stage.

3.  After 30 years, any regrets?

Nobody’s perfect. Even the best hitters in baseball are expected to strike out every once and a while. And over the years, we’ve had a few names in the portfolios which haven’t worked out. But importantly, by learning from our mistakes, we reduce the likelihood of making a similar mistake. As we quoted Mark Twain in our presentation, “History doesn’t repeat itself, but it often rhymes”. In the late 90s we invested in the shares of Mark’s Work Wearhouse. At the time, it was an aggressive retailer, growing through new store openings and acquisitions. Although it performed well for us initially, in the early 2000s, the company’s fortunes slowed while the stock market was reeling from the “Tech Wreck”. As we tried to sell our position, we were disadvantaged by the illiquid nature of the shares and so we were price-takers. Lesson learned: sell when you can, not when you want to. Conversely, our long-term performance record would suggest that our winners have more than offset the regrettable situations along the way. For example, Alimentation Couche-Tard has proven to be a tremendous success for our clients over the many years that we have held it in portfolios, and some of our earliest clients from 30 years ago hold bank shares that have a cost base that is below these stocks’ current annual dividends.

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If you weren’t able to attend our annual events this November, you can view a shortened version of the presentation (with our Nexus commentary) on our website by clicking here.