Teal Linde's Market Outlook
Teal Linde, manager, Linde Equity Fund
FOCUS: North American mid and large cap stocks
In 2021, there has been virtually no stopping stock markets in their relentless quest for new highs. But, together with these new market highs, we have seen consumer price inflation to a degree not seen in decades.
To some extent, higher consumer prices and stock prices are being caused by the same thing – vast asset purchases by central banks, which print money to finance huge government deficits, thereby creating vast sums of less valuable money. To be clear, inflation is being influenced by supply side factors too, such as recent underinvestment in production, storage and transportation capacity, labour shortages caused by an aging population and a misalignment between workers’ skills and employer needs and increasing international trade tensions.
Fiscal and monetary stimulus has caused retail demand to be roughly 15 per cent higher today than it would likely have been if the pandemic had not occurred and supply is having a hard time keeping up with this supercharged demand. For example, if retail demand for services rises 15 per cent, you need 15 per cent more people to deliver the services to keep prices stable. There is insufficient excess labour capacity to fill these needs and resultingly job openings now exceed the number of unemployed, which is inherently inflationary, as prices must rise to increase supply and reduce demand.
Investors may need to plan for a scenario where inflation remains elevated for much longer or, alternatively, one where overall market returns are more benign due to lack of monetary support. Either way, stock selection will be paramount to achieving decent investment returns. During inflationary periods, companies that perform best are those with greater pricing power and ones that don’t require constant capital reinvestment because these investments become more expensive as the value of a dollar drops.
Colliers International Group Inc. (CIGI TSX) - last purchased on Nov. 1, 2021 at $178.65
Colliers is led by one of Canada’s leading entrepreneurs, Jay Hennick, who is the Chairman, CEO and largest shareholder of the company. Colliers is the fastest growing global real estate professional services and asset management company operating in 65 countries. Colliers is expected to grow organically in the mid-single digits annually and at double digit growth rates when including acquisitions. As the faster growing smaller rival among industry giants CBRE Group and Jones Lang LaSalle, Colliers is also considered more entrepreneurial driven with insider ownership of nearly 40 per cent. Colliers has made a meaningful expansion into recurring revenue services such as investment/property/project management, engineering, valuation, and loan servicing (54 per cent LTM EBITDA). Having made significant steps to grow its brand worldwide, and with significant runway to consolidate the global fragmented commercial real estate services industries, the successful execution of this plan is expected to lead to shareholder value creation, building upon management's long-term track record of success.
Linamar Corporation (LNR TSX) - last purchased on Oct. 15, 2021 at $69.86
Linamar is a company that should benefit simply from a return to normal operating conditions – a reversion to the mean. With 2019 impacted by the GM strike, 2020 impacted by the coronavirus, and 2021 hurt by supply chain shortages, a normal year in 2022 or 2023 should enable the company to return to higher levels of profitability and a higher share price. From a financial perspective, Linamar earned an average ROE of 20 per cent from 2013 to 2017. For the trailing twelve months, its ROE is around 10 per cent. With current book value at $70 per share, if the company can return to earning an ROE of 15 per cent, that would equate to EPS of $10.50 per share. Apply a 10x P/E multiple to $10.50 of EPS would result in a $105 share price, up over 35 per cent from its current price. If ROE returns to 20 per cent, EPS will become $14 per share. At a 10x P/E multiple, the share price would be $140. Linamar is an attractive reversion to the mean investment opportunity.
Premium Brands (PBH TSX) – last purchased on Nov. 2, 2021 at $133.96
Premium Brands is one of Canada’s largest food companies and one of North America’s largest sandwich companies. The company is an investment platform which is focused on acquiring and building specialty food businesses in partnership with talented entrepreneurial management teams. Once acquired, the objective is to turn these well-run, good companies into great companies by providing additional capital and marketing expertise to support growth. The company owns over 50 different brands including Freybe, Duso’s, Oberto, Grimm’s, Bread Garden Go and many other specialty food companies, which are privy to industry tailwinds including increased ingredients transparency, on-the-go consumption, local sourcing and products that are free from antibiotics and unnatural/artificial additives. The company has long term track record of delivering double digit annualized returns. During inflationary times, food business enjoy particularly strong pricing power as everyone needs to eat.
PAST PICKS: Nov. 16, 2020
Equinox Gold (EQX TSX)
- Then: $13.62
- Now: $10.39
- Return: -24%
- Total Return: -24%
Premium Brands Holdings (PBH TSX)
- Then: $97.50
- Now: $133.15
- Return: 37%
- Total Return: 39%
Ensign Energy Services (ESI TSX)
- Then: $0.64
- Now: $1.85
- Return: 189%
- Total Return: 189%
Total Return Average: 68%