Brascan, Shoppers among Gluskin's favourites
Lots of stocks with new highs every day, he points out
Sonita Horvitch -- National Post
Thursday, July 04, 2002
Conservative investors picking stocks of companies with steady earnings growth trading at reasonable valuations have been doing well, despite the weakness in the overall market, says Ira Gluskin and Bruce Leboff, partners at Toronto-based Gluskin Sheff + Associates Inc.
A veteran of Bay Street, Gluskin notes that "in the old days the thesis was that when markets declined, they did so across the board." The current bear market is different. "There are a large number of stocks on the new highs list every day and are managing to buck the indexes."
Founded in 1984, Gluskin Sheff serves both private clients and institutions. Essentially a bottom-up stock picker, its mandate is to manage both Canadian and U.S. equities using three main portolio models. It has a pure value portfolio model, as well as one that allows for both value and growth stocks, with the mix determined by the market climate. Last year, it launched a premium income portfolio that concentrates primarily on income trusts.
Gluskin Sheff's value/growth model is currently half value and half growth. "The latter is at the conservative end of the spectrum focusing on companies with steady, predictable earnings/cash flow growth," says Leboff.
The current market weakness, says Gluskin, is concentrated on high-technology and other high multiple stocks. Mutual funds specializing in these growth stocks are facing redemptions, which puts further pressure on this segment. Value managers, by contrast, are attracting new money, which is boosting this side of the market.
The U.S. equity market continues to be afflicted by a lack of investor confidence, says Leboff. Although the economy is showing distinct signs of improvement, investors are preoccupied with the "corporate abuse of trust." Enron Corp.'s collapse raised questions about the quality of financial reporting in the United States, says Leboff. This has been reinforced by "recent revelations, including the alleged accounting fraud by drug store chain Rite Aid Corp."
Gluskin notes that one of the reasons the Canadian equity market has been generally doing better than the U.S. market is that "it is escaping with less contemporary financial crimes."
In the Canadian equity market, Gluskin Sheff recently trimmed:
- Alcan Inc. (AL/TSX), which closed recently at $55.25 and has a 52-week range of $67.90 to $42.75. The stock of this Montreal-based major global aluminium producer has risen from valuations which "reflected the despair surrounding the Sept. 11 terrorist attacks to valuations more reflective of an economic recovery."
Gluskin Sheff's number one Canadian pick is:
- Brascan Corp. (BNNa/TSX) $34.02 ($37.50 - $22.10). Gluskin selected this stock in this column of Aug. 31, 2001, when it traded at $28.25. This Toronto-basedcompany is focusing on real estate, energy and power generation and financial services. "It has good free cash flow and a focus on returns on capital and maximizing shareholder value." Gluskin notes that 10 years ago, Brascan was "high on the list of companies with poor corporate governance, but our prediction is that under new CEO Bruce Flatt, it will be at the top of Canadian companies with model corporate governance." The company has become more transparent and forthcoming in its relationship with shareholders, he says.
The company is being transformed from a conglomerate to a group of "high-quality cash-flow-generating operating businesses," says Leboff, who estimates that the company's NAV is about $43 a share. Gluskin adds: "It is the type of company investors want to own in this market; it is solid, financially strong and has no technology holdings." Brascan missed the tech boom in the '90s and is now benefiting from this, he says.
Another selection in Canada is drug retailing chain:
- Shoppers Drug Mart Corp. (SC/TSX) $24.59 ($25.96 - $16.51). Based in Toronto, this company recently made a secondary offering of shares at $23 a share. Gluskin Sheff participated in this offering. The company made its initial public offering last November at $18 a share. "Shoppers Drug was successfully conceived by Murray Koffler in the late '60s and has had a long history of growth and high acceptance by consumers," says Gluskin. The business offers steady growth and is benefitting from favourable demographic trends, he says. Shoppers Drug is now under the leadership of chairman and chief executive Glenn Murphy, who comes from Loblaw and has brought with him a number of other Loblaw executives. Traditional drug chains are facing competition from Loblaw and Wal-Mart as the lines between these consumer-staple retailers become more blurred, he adds.
"Murphy knows what it takes to dominate the business -- including the importance of private label products and of ensuring that merchandising and service is consistent across the chain," Gluskin says. Consensus EPS estimates are 90¢ for 2002 and $1.20 for 2003. "The stock is cheap relative to Loblaw and to both other Canadian and U.S. drug retailers," says Leboff.
An income trust that they like:
- Sun Gro Horticulture Income Fund (GROun/TSX) $11.15 ($11.15 - $9.91). Based in Vancouver, B.C., this trust is the largest producer of peat moss in North America and a distributor of peat moss and peat-based growing products for use in gardens. The trust sells to professional growers and sells its standard mix through retailers. "Demographics and increased home ownership favour horticulture," says Gluskin. The current distribution by the trust is $1.25 a share. "The business does not require major capital expenditures and if the cash flow grows modestly, so will the distribution, which will in turn drive the unit price."
In its Canadian portfolio, the two managers continue to like residential property management specialist, FirstService Corp. (FSV/TSX) $38.17 ($44.93 - $30.77), which Gluskin selected in the Aug. 31 column at $36.25. "It has a high degree of recurring revenue," says Gluskin. They also remain enthusiastic about CHC Helicopter Corp. (FLYa/TSX) $32.55 ($35.50 - $12.25), which is one of the largest providers of commercial helicopter transportation services. This was a selection by Leboff in this column of Feb. 12, when it traded at $19.60. "The recent quarter was the 10th in a row where earnings have been higher than the corresponding quarter the year before," says Leboff.
Turning to the United States, Leboff is selecting:
- J.M. Smucker Co. (SJM/NYSE) US$33.31 (US$37.50 - US$32.90). Headquartered at One Strawberry Lane, Orrville, Ohio, this company, founded in 1897, is a major producer of jams, preserves, ice-cream toppings and other food products. Last October, J.M. Smucker agreed to acquire Jif peanut butter and Crisco brands from Procter & Gamble Co. via an issue of Smucker stock. As a group, P&G shareholders owned slightly more than 50% of Smucker stock following the transaction, which has put some downward pressure on the share price, Leboff says. It currently trades at less than 17 times the calendarized earnings estimates for 2003 of more than US$2 per share, which Leboff says "does not reflect its market dominance and its pristine balance sheet."
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