Full episode: Market Call Tonight for Monday, November 19, 2018
Colin Stewart, CEO and portfolio manager at JC Clark Limited
Focus: North American large caps
Continued trade concerns between the U.S. and China and the upward movement in interest rates (which typically puts downward pressure on price-to-earnings ratios) appear to be the main culprits for the recent sell-off. While it’s unclear if the recent volatility is the beginning of the next bear market or a more normal correction in the context of a rising market (of which we suspect the latter), we continue to believe that we are in the late stages of this economic and market cycle. Economic data and corporate earnings are generally strong, but interest rates are rising, global liquidity is contracting and valuation multiples are unlikely to expand. These late cycle characteristics suggest that risks are elevated and a more defensive posture is warranted.
INFORMATION SERVICES CORPORATION (ISV.TO)
Last purchase one week ago at $16.15.
This company is a Saskatchewan land/corporate registry business taken public by the government in 2013. It has three divisions: Registry, services and technology.
- ISC is an excellent business, with a monopoly-like position in its core registry division.
- The services and technology divisions provide essential data to consumers, law firms and financial institutions.
- It’s a high-quality business: It has recurring revenue, high barriers to entry, high return on invested capital and significant free cash flow generation.
- ISC is deeply undervalued: It trades at 7.8 times enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) and has an 8.3 per cent free cash flow yield.
- The company has an attractive dividend yield of 5 per cent.
- It has growth opportunities, both organic and via M&A.
GREAT CANADIAN GAMING (GC.TO)
Last purchase on Nov. 5 at $42.80.
Great Canadian Gaming operates several casinos and hotels across Canada. The original business focused in B.C., but they’ve more recently expanded aggressively in Ontario as gaming assets have been privatized by government.
- Great Canadian was awarded a contract to operate both the GTA West and GTA gaming bundles, very valuable assets which give the company and its partners an effective monopoly on gaming in the Toronto area.
- There’s significant growth potential as Great Canadian builds out flagship casinos at the Woodbine and Durham sites.
- Toronto is an extremely underserved gaming market with large upside potential.
- The company has a strong financial position and a history of disciplined capital allocation.
- The valuation is attractive at 7.5 to 8 times EV/EBITDA.
BRICK BREWING (BRB.TO)
Last purchase on Oct. 25 at $3.85.
Brick is a Canadian craft brewer with a range of proprietary brands (Waterloo, Laker, Landshark Lager) in addition to a significant co-packing business.
- It has a strong balance sheet and cheap valuation (10 times 2019E EV/EBITDA), which is a significant discount to other beer industry participants.
- Large amount of excess capacity and expertise in producing a variety of beverages (beer, cider, ready to drink) means Brick is very well positioned to take a leadership role in the emerging cannabis-infused drink space.
- We believe Brick is a potential acquisition target for either a larger brewer or a cannabis company due to its excess capacity, strong brands and solid management team.
PAST PICKS: JAN. 23, 2018
We exited the position this November.
- Then: $11.99
- Now: $7.76
- Return: -35%
- Total return: -33%
TRICAN WELL SERVICE (TCW.TO)
Sold the position from our fund in May 2018 due to concerns over activity levels in the Canadian oil and gas sector.
- Then: $4.27
- Now: $1.36
- Return: -68%
- Total return: -68%
IBI GROUP (IBG.TO)
Sold the position from our fund in August 2018 due to weak quarterly results.
- Then: $8.99
- Now: $4.41
- Return: -51%
- Total return: -51%
Total return average: -51%
JC Clark Focused Opportunities Fund
Performance as of October 2018
- 1 year: 0.1% fund, -6.2% index
- 3 years: 5.3% fund, 3.6% index
- 5 years: 2.6% fund, 2.4% index
INDEX: TSX Composite.
Returns are net of fees.