Our Top Buy For March
Summary
- Every month we release a list of "top picks."
- This month's pick is little-known ACLLF.
- We share our thesis here.
- Looking for a portfolio of ideas like this one? Members of High Yield Investor get exclusive access to our model portfolio. Get started today »
The calendar has turned to March and - after a month that saw considerable volatility in our portfolio holdings - we recently published an updated list of Top Picks. Today we will share with you our top pick for March: ATCO Ltd (OTCPK:ACLLF).
Our February Top Picks for our Equity Portfolio were:
- Energy Transfer (ET): Midstream
- ATCO (OTCPK:ACLLF): Infrastructure
- Universal Insurance (UVE): Insurance
- Ingredion (INGR): Consumer Defensive
- Hanesbrands (HBI): Consumer Cyclical
Overall, we were blessed to continue our streak of significantly outperforming the market indexes:
They all outperformed the NASDAQ (QQQ) and all but one significantly outperformed the Dow Jones (DIA) and the S&P 500 (SPY).
On average, the Equity Portfolio top picks returned a whopping 16.63% from February 1 - March 1 compared to just 4.69% for DIA, 3.55% for SPY, and 0.36% for QQQ.
ET, INGR, HBI, and UVE have all appreciated to the point where they are no longer our top values given their strong outperformance relative to the index and several of our other holdings. As a result, we are removing them from this month's Top Picks list.
However, ACLLF - though it generated positive returns last month - was our lone underperformer despite reporting very strong earnings, so it will remain on our Top Picks list this month as our top pick.
As we recently outlined in our article 3 Reasons We Are Buying ATCO Instead Of Brookfield Infrastructure, there is a lot to like about ACLLF that reminds us somewhat of fellow Canadian-based infrastructure investor Brookfield (BIP) (BIPC) (BAM), but given its cheap valuation, we like it even more right now:
#1 Strong Balance Sheet
With an A- credit rating and very low interest costs (they recently issued 30-year debt at an incredibly cheap 2.609% interest rate), ATCO enables investors to sleep well at night.
The credit profile is supported by its crown jewel core utilities business that provides the majority of its earnings and benefits from a strong regulated moat, 20% lower electricity distribution costs than industry average, 38% lower electricity transmission costs than industry average, 57% lower natural gas distribution costs per customer than industry average, 60% lower natural gas operations & maintenance costs than industry average, 71% fewer hit natural gas lines than industry average, 77% fewer natural gas leaks than industry average, and average returns on equity that are 230 basis points above the approved level and 190 basis points above peer averages over the past decade. 
They also have a large pile of current assets ($1.6 billion), significant liquidity, and a well-laddered debt maturity schedule:
S&P justified their A- credit rating with:
Our view of ATCO's business risk profile as excellent has not changed, largely reflecting the Company's lower-risk regulated electric and natural gas utility operations, large customer base, regulatory and geographic diversity, and effective management of regulatory risk.
#2 Impressive Growth
What makes ATCO so special to us, however, is that it isn't just a sleep well at night, slow growing, conservatively financed utility business. It is also a strong growth machine.
In Q4, they reported 21.6% year-over-year adjusted earnings per share growth (and 10% full year adjusted EPS growth) in large part thanks to their high-growth structures & logistics business as well as strong performance in their ports and energy generation businesses.
These ancillary businesses combine with the company's increasingly global footprint to provide management with near limitless opportunities to deploy capital into high-growth opportunities and serve as a nice complement to the steadier but slower-growing core utilities business.
Management plans to continue growing their structures & logistics business - which they did very successfully in Q4 by closing an acquisition on the last day of the quarter and by winning several new major contracts - as well as significantly expand their ports and renewable power generation businesses.
Their utilities business (OTCPK:CDUAF) is also investing in future growth as it is in the midst of a massive $3.5B CAD growth program set to end next year:
As a result, when combined with their conservative 58% payout ratio, we feel confident that the company will be able to continue its 28-year dividend growth streak.
#3 Dirt Cheap
Last, but not least, shares are priced at a clear bargain:
(1) The price to book ratio is at all-time lows:
(2) The dividend yield is at all-time highs (note that the dividend yield is actually 4.8% on a forward basis after their recent dividend hike):
This discount is even more remarkable given that the company grew adjusted earnings per share by 10% in the midst of a global pandemic and an energy sector downturn which severely impacted its core utilities market (Alberta).
In fact, not only has it underperformed its fundamentals, but it is underperforming its largest holding, CDUAF, by 285 basis points since the beginning of last year's market crash despite its ancillary businesses outperforming the utilities business this year in terms of overall growth and performance.
Investor Takeaway
We believe that ATCO is severely underpriced by the markets right now and is being overlooked as a less-liquid and lower-dividend yield version of slow-growing Canadian Utilities. However, their earnings yield and price to book value metrics show that ATCO is actually significantly cheaper than Canadian Utilities and it is also much faster growing with a long-term track record of outperforming Canadian Utilities, the Utilities sector (XLU), and the broader stock market:
Combining the deep value with the safety inherent to its fortress balance sheet and wide moat core utilities business, we are confident in making this stock our top buy and one of our largest holdings.
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This article was written by
Samuel Smith is Vice President at Leonberg Capital and manages the High Yield Investor Seeking Alpha Investing Group.
Samuel is a Professional Engineer and Project Management Professional by training and holds a B.S. in Civil Engineering and Mathematics from the United States Military Academy at West Point and a Masters in Engineering from Texas A&M with a focus on Computational Engineering and Mathematics. He is a former Army officer, land development project engineer, and lead investment analyst at Sure Dividend.
Analyst’s Disclosure: I am/we are long ACLLF, BAM, INGR, HBI, UVE, ET. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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