Looking Under The Hood

Value Versus Growth Investing - ​By Dan Good                                        

Growth Investing Dominates
With Growth investing “all the rage” it is useful to step back and see exactly what you are being sold and wanting to buy. And also what you are unhappy with and want to dump to achieve better returns on your money. Fidelity has a number of billboards in the city and also television ad blitzes espousing growth investing. The “future looks bright” with blockchain, artificial intelligence, self driving cars and virtual reality. In reality this is just a sales pitch with the ultimate goal getting of getting more of your money. This is fair but in the world of investing what is popular today becomes boring tomorrow. Contrarian investing always wins out. Going against the crowd gives you better returns with less risk but it requires patience, patience and more patience.

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Hiring a Mechanic
Investing is difficult in that most people choose not to go on their own and therefore have to rely on the expertise of advisors and portfolio managers. Mutual funds were just beginning to get popular in 1981 when I first became licensed and now there are more funds than individual stocks on the market in Canada. But that doesn’t mean you can’t look under the hood and see what you have within these funds.
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Peter Cundill, a hero of mine, received the “Career Achievement Award” in 2001 as his Cundill Value fund boasted a record of 17% compounded over a 25 year period. I adopted his method of looking for $1 in value for 50 cents or less early on in the 1990s and can attest to its success. So I am always going to be skewed towards the value investing style and away from growth investing (Mark Schmehl) or valuing companies based primarily on a discounted cash flow model (Joel Tillinghast). Buying great companies at a good price (Trimark) also has appeal but I went with Cundill for many years and he did well for my clients up until when Mackenzie Financial bought him out. 

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Dollarama
This company is well known and is one of the anchor tenants in my mall in Bonnie Doon. As an investor it is the antithesis of value investing. I looked at their financial statements today – their year end is January – and came up with a few observations. You can look at their statements too from their website if you wish.
 
 Peter liked to buy companies trading below book value. But with Dollarama you cannot calculate a price/book number as the book value is negative roughly $250 million. You simply cannot divide by a negative number. So how can a profitable company have a negative retained earnings number? Simple, they borrow money and buy back their own stock to force the share price up. They earned roughly $500 million this last year and spent more then $800 million buying back their own shares.
 
 For their balance sheet they have $50 million in cash, inventory of $500 million and building and hard assets of another $500 million. Offsetting this they owe $228 in payables, and roughly $1.6 billion in debt (up from $1.3 billion last year). The bottom number is that they owe $250 million more than they own. And that includes “goodwill” of roughly $800 million. Without that they would owe roughly $1 billion more than they own in assets. It gets even better, the market values the company at just under $17 billion.
 
So who owns these shares? According to Morningstar – you can Google Dollarama top shareholders – BMO Dividend Fund is the top shareholder and Fidelity Canadian Growth Fund the second largest. Others include Fidelity Canadian Balanced and True North and TD funds Dividend Growth, Monthly Income and Canadian equity. Considering it has a dividend yield of .29% I find and any “dividend fund” holding these shares particularly grating. As Obama stated in 2008 “You can put lipstick on a pig but it is still a pig.”   

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Melcor
I miss having some of the mentors that I listened to over the years around to ground me in what is right and what not to do in investing. Thankfully John Templeton’s wisdom lives on through books and YouTube videos. For example he stated that the best place to look for value is in places where the prospects are the worst not the best. For example, I have shares in a Company called Birchtree. If you look at their video from a few years ago everyone is smiling, the Company is making record profits, they have aggressive plans for expansion as they own a lot of exploration land for drilling and their stock price was close to $15 in 2014. On Friday their shares traded below $3.20. They are primarily a natural gas producer so after a few Google searches I came across a presentation by a top oil and gas analyst where he stated that the conditions for natural gas prices in Alberta are the worst he has ever seen. Producers are overproducing, pipelines are not getting built primarily for political reasons so we can’t get our product to market and fracking has kept the price of natural gas low. Again using the bus analogy, everyone is getting off the bus. We will see. Obviously I am not making a recommendation for the stock but you can see the difference between how a successful career investor like John Templeton thinks versus flavor of the day investors that focus on what is new, what is hot, and dismiss even doing fundamental valuations.

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International Investing 
I came across an article from huffingtonpost.ca which headlined “Ugly Duckling Canadian Dollar Is Worst-Performing Currency of 2017 So Far” (dated May 5th of 2017). The dollar could then buy you 73 cents U.S. Now it is 10% higher so international investing just got 10% cheaper – an opportunity?