Happy New Year! I am starting a tradition this year. I will be listing the top five largest stock positions in my portfolio at year-end, in reverse order, and what attracts me to them. Note that I am excluding Cymbria, which is an exchange-traded fund and how I get some global equity exposure while at the same time participate in the upside of money manager EdgePoint Wealth. I have a total of 23 positions. These five represent about 51% of the my portfolio.
5. Newalta (NYSE:NAL)
North America's leading provider of engineered environmental solutions that enable customers to reduce disposal, enhance recycling & recover valuable products from industrial waste. The company serves customers directly on their site and through a network of 85 facilities in Canada & the U.S. With more than 250 operating permits.
Why I like them:
- Since the stock converted from an income trust to common equity in 2009, dividends have increased four times from 5 cents/quarter to 11 cents/quarter. NAL has shown their ability to consistently increase dividends on an annual basis.
- Revenue increased from $483 million in 2009 to $726 million in 2012. YTD, revenue is up another 10% YoY. Net income has been choppier, but the overall trend is positive.
- Al Cadotte has been CEO of NAL for the past 20 years. He owns over 250,000 shares of the company ($4.3 million). Al and the management of NAL think about the longer term picture and invest in projects based on this philosophy.
- As environmental laws get stricter and companies try to show their "green" side to stakeholders, there will be an increasing demand on environmental solutions.
- Over the years, NAL has consolidated the industry and now has a presence across Canada and into the U.S.
- The company has a leveraged balance sheet that could get squeezed in another financial crisis. They have been operating without a cash cushion as they aggressively spend on new capital projects.
4. Loyalist Group (LOY)
LOY is an educational organization that is in the business of providing a multitude of educational services with an emphasis on teaching English as a Second Language, Professional Development, and College Transfer Programs.
Why I like them:
- LOY is consolidating ESL educational centres in Canada.
- Revenue and net income growth has exploded as the firm adds more educational centres to its stable. Both top and bottom line growth are up over 100% in the latest quarter YoY.
- The stock is trading at a very attractive forward P/E multiple
- Extra income may come from leasing apartments to students.
- If they make a bad acquisition, they will destroy shareholder value and further dilute shareholders.
3. MTY Food Group (NYSEARCA:MTY)
With 31 restaurant banners and over 2,500 outlets, primarily in Canada, the firm is a leader in the quick-service restaurant market in Canada. The vast majority of locations are franchises.
Why I like them:
- The firm has grown revenue and net income every year for the past 11 years.
- Since most of the locations are franchises, MTY receives a recurring revenue stream from royalties and is able to generate a 25% net profit margin
- Stanley Ma, President and CEO, owns over 25% of the company. Over the past 5 years, the number of shares he owns has not changed, nor has the number of shares the company has issued.
- Conservative balance sheet, minimal debt and large cash position that is used to make acquisitions instead of diluting shareholders with issuing new stock.
- A dividend was initiated at the end of 2010. Since then, it has been increased twice and I expect another increase for the next quarter. With a payout ratio of 21%, there is still a lot of room for the company to use cash flow to make strategic acquisitions.
- The company is gradually expanding into other countries. This is an opportunity for growth but can also be a risk.
MTY has had 5 consecutive quarters of negative same store sales growth. Part of this is due to the acquisitions of Country Style and Mr. Sub. These are two long-time and well-known brands in Canada, but have faced hard times due to Tim Horton's and Subway, respectively. Extreme Brandz, a recent acquisition and owner of the Extreme Pita and Mucho Burrito banners, should help MTY turn same store sales around. Unlike Country Style and Mr. Sub, which have both been contracting for years, Extreme Brandz is a relatively new company that has grown aggressively and is gaining brand recognition in the marketplace.
2. Winpak (WPK)
Winpak Ltd. manufactures and distributes packaging materials and related packaging machines primarily for the packaging of perishable foods, beverages, and for use in health care applications in North America.
Why I like them:
- The firm had revenue of $506 million in 2009 and has a goal of reaching $1 billion by 2015. To achieve this, they have undertaken a large capital project to expand capacity at their existing locations. They have been able to fund this entirely from cash flow.
- A rock solid balance sheet with over $140 million in cash and no debt. This gives them flexibility to make an acquisition or pay a special dividend.
- Given a payout ratio of around 10%, there is a lot of room to increase the dividend in the future.
- An experienced management team that has been working together for a number of years.
The firm is majority owned by a Finnish conglomerate. Will the Finns be willing to loosen the purse strings and reward shareholders by distributing at least some of the massive cash balance (currently $2.15 per share)?
1. Issuer Direct (NYSEMKT:ISDR)
ISDR provides disclosure management solutions and cloud based compliance technologies in the United States. The company offers products and services that enable companies' to produce and distribute their financial and business communications online and in print.
Why I like them:
- In my opinion, ISDR is one of the best run and most transparent firms trading on the OTC BB. The firm has a majority of independent directors, which I don't think I've seen with any other sub $50 million firm.
- ISDR has a history of making strategic acquisitions and most recently has made a transformative acquisition, which more than doubles revenue.
- ROE has been at least 20% every year for the past 5 years
- Brian Balbirnie, founder and CEO, owns over 30% of the company. Wes Pollard, CFO, owns 5%.
The latest acquisition is transformative. While it offers a lot of opportunities, there are also risks involved.