If clients are looking for investment opportunities, help them look for companies that are trading at reasonable prices.
Two such companies are CN Rail and Gildan Activewear, says Craig Jerusalim, portfolio manager of Canadian equities at CIBC Asset Management. He co-manages the Renaissance Diversified Income Fund.
CN Rail’s competitive advantage is that its rail network extends across Canada and then “down through the heart of America,” he adds. You can combine that with its strong financial position and its lowest operating ratio in North America.
As well, says Jerusalim, “its management team has consistently created value for shareholders.”
For its part, Gildan Activewear has spent hundreds of millions of dollars to drive down its production costs and, as a result, has improved its margins, says Jerusalim. Gildan now has a tremendous pricing advantage over Hanes and Fruit of the Loom, for example, both of which would “also need to spend hundreds of millions of dollars that they likely don’t have in order to catch up.”
It has been predicted that Gildan “will be close to a net cash position next year, giving them the flexibility to raise their dividends, further invest in their business, and be opportunistic [about] acquisitions,” he adds. The company can also “be supportive of their stock if there’s any short-term [market] weakness.”
Further, says Jerusalim, even though the activewear company trades in line with its global peers on a valuation metric, the company could offer “double-digit EBITDA growth over the next couple of years.”
5 traits of quality companies
Jerusalim invests in companies that meet his definition of quality in five respects. He says, “Most traditional definitions of quality have to do with earnings stability and consistency.” But he also looks for “high margins, low leverage, strong management teams and, overall, growth at a reasonable price.”
Here’s a breakdown of those five qualities:
1. In terms of earnings stability, Jerusalim looks for low variability, “which means low volatility, or recurring earnings.” He finds banks and telecom companies offer consistent earnings growth. Read: 3 reasons to invest in media companies
2. A company’s margins must be sustainable and high, he adds. “A company has to have some sort of competitive advantage. Otherwise, [competitors] will enter the market and erode [its] margins over time.” In the insurance space, for instance, Jerusalim finds Intact Financial has a pricing advantage over its peers due to its scale.
3. Regarding low leverage, Jerusalim looks for companies with “strong financial positions [and] balance sheets. That gives companies flexibility and optionality. [So], when things don’t go their way or the market turns, companies aren’t forced into doing something they don’t want to do,” such as issuing equity at the wrong times. Read: Now’s the time to overweight corporate bonds
Then, “when others get trouble, the company is able to take advantage of those downturns.”
4. Quality companies have management teams that have a strong track record of success, he adds. “I like to hear that companies have a history of creating shareholder value.”
5. Finally, he evaluates the price of stocks by looking at growth and top line revenue, which typically “funnels down into growth in earnings and growth in cash flow and, ultimately, into free cash flow. That’s used to make creative acquisitions or buy back shares, or to grow dividends. Companies that can grow dividends consistently tend to outperform.”