Stock Selection: Really Great management
This is Part 5 of A Portfolio For Mom, which explores the portfolio we're building for one of our most important clients. The series outlines our investment philosophy, centered on loss avoidance, while hopefully educating our client through a variety of case studies.
We'll introduce the philosophy, present case studies, and discuss potential stock candidates. With the help of the Seeking Alpha community, we hope to improve her investment returns.
In this edition we'll continue with stock selection introducing five companies with really great management who are candidates for A Portfolio For Mom. As with the last stock selection article, we'll introduce each business and why it fits.
Really Great Management
We like to think about really great management as that neighbor who manages their finances very well. Their house is paid off, they have no debt issues, and they don't spend money on luxuries like fancy cars or big renovations. They just seem to make all the right moves.
The following five companies are like that neighbor we admire. They aren't the biggest earners in the neighborhood but they always seem to spend way less than earn and when they do spend, they spend really wisely.
Metro (OTCPK:MTRAF) is Canada's third largest grocer and best performing throughout history. Its network on convenient locations in Ontario and Quebec are a familiar staple for almost everyone in Central Canada. They have a history of growing revenue and earnings steadily over time while not burdening shareholders with excessive debt.
One of the challenges the business faces is our increased propensity to eat away from home. We continue to spend more and more dollars at restaurants as opposed to grocery stores. In addition, competition is fierce and management can never take its eye off the ball.
Why it fits
The formula management uses has been simple and consistent: grow sales, spend money wisely and return any excess cash to shareholders. As a result of these wise decisions, the company has not only outperformed its peers Loblaw (OTCPK:LBLCF) and Empire Co but many "higher-risk" companies in Canada.
That make not seem like a big deal but this simple, boring business has way less risk than any oil and mining company. For all the fuss over oil and gold, we can achieve great returns with substantially less risk at companies like Metro.
Couche-Tard (OTCPK:ANCUF) is one of the world's largest operators of convenience stores and gas stations with networks in Europe, United States and Canada. It recently made headlines after buying Esso gas stations in Toronto, Ottawa and Montreal, which continues their impressive history of buying additional stores.
Why it fits
You could buy one of several convenience store stocks in North America. However, none has a management team that is comparable to Couche-Tard. Not only has this company grown well, it's never burdened shareholders with excessive debt. It does borrow money from time to time but when it does, it pays it back rapidly.
Part of this is due to the fact one of its founders, Alain Bouchard, owns a large stake in the company. These characteristics provides us with some comfort. With Couche-Tard, we know we are investing alongside a founder and fellow shareholder.
Constellation (OTCPK:CNSWF) sells software to a variety of industries. They are some of the most hidden products we never think of. Your hairdresser uses software to help run her business. A winery needs specific software to run its operations. Home builders. Fitness clubs. Golf courses. All of these businesses (and many more) sell a product or service but behind the scenes need some type of software to help manage day-to-day operations.
These boring products aren't visible to consumers on a daily basis but they are critical to the small business owners that use them.
Why it fits
The management team has historically been one of the best "spenders of money" in corporate Canada - in other words, they get a lot of value for every dollar they spend. Important to our philosophy is the boring nature of the products it sells - talking about software for hair stylists is really boring. Fortunately, that also means its been very stable historically. This stability has meant Constellation hasn't reported a decline in its earnings and, more importantly, never lost money. Knock on wood.
In addition, while the company has used debt, it has never had excessive debt and always repaid it quickly. These are features we expect any individual to abide by and so should the businesses we invest in.
Saputo (OTCPK:SAPIF) is Canada's largest dairy processor and North America's third largest. In simpler terms, it is one of the world's largest producers of cheese and milk (among other products). Dairy consumption is one of the staples in life, which, like pizza, gives us a head start when trying to avoid losing money.
We're confident we'll be eating pizza in 25 years (and we're just as confident cheese will be on most pizza's). We think about it in a simple manner: lot of really smart people around the world are trying to reduce our consumption of oil but fortunately, no one is trying to reduce our consumption of cheese.
Why it fits
Like Alimentation Couche-Tard, Saputo is led by a family who own a significant stake in the company. As a result, they've taken a very conservative, low-risk approach to running the business. And like Couche-Tard, when they borrow, they pay it back very quickly.
We like Saputo's financial health, track record, and management team. By avoiding too much debt, the family shows they don't want too much risk and, for that reason, we're happy to invest alongside them.
Restaurant Brands (NYSE:QSR) is the owner of Burger King and Tim Hortons. While BK is a global brand, the company is just beginning to roll-out Tim Horton's outside Canada.
Much has been written about Tim's spotty history in the U.S. From failed acquisitions to slow growth, the brands failure is ingrained in our thinking. I would argue that is only partially true. It's less often reported that the company has increased sales for 20 straight years in the United States. The company has a very low-risk strategy for growing Tim Horton's in America and, if they fail, we think the financial risk to the business and shareholders is low.
Why it fits
While the company recently borrowed a lot of money to buy Tim Horton's, we believe they'll pay it back very quickly. Tim's has a great history of "printing money" so this gives us confidence our debt payback prediction will come true.
The management philosophy behind the company is emerging as one of the most famous in the world. It is founded upon a simple principle and a core theme in our philosophy: spend money wisely. We can relate to that philosophy, which gives us confidence the company will be run well for the benefit of shareholders.
Mom Approved (Hopefully)
These stocks have a little bit more notoriety than our previous five but we think still meet our criteria of unexciting, profitable, and in good financial health. We hope they continue to be boringly profitable for years to come. Our twist here is they, in our view, have some of the best management teams in Canada - something we think Mom, as a great CEO of the household, would appreciate.
Here's our list of candidates for A Portfolio for Mom thus far:
What do you think of our list? Do you know any stock with Really Great Management we're missing? How important is management when you select stocks?
Disclosure: I am/we are long MTRAF, QSR, CNSWF, SAPIF, ANCUF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.