Canadian telecoms are a great call right now.
Craig Jerusalim, portfolio manager at CIBC Asset Management, says the sector is in a unique position “with penetration steadily increasing, usage and consumption growing rapidly, and utility expanding in lockstep.”
The reason for this positive backdrop is the smartphone: as manufacturers release better models, households are using more devices and cutting their landlines. Further, new Canadians are rapidly adopting these devices, says Jerusalim, who co-manages the Renaissance Canadian Small-Cap Fund.
But that’s not where the story ends.
“Wireless providers have improved customer service,” he explains. Satisfied customers means churn is at a record low, and if you combine that with subscriber all-time highs, “profitability is extremely strong right now, even in the four-player wireless markets,” he adds.
Telus, one of the major Canadian telecoms, “has the has the highest makeup of wireless in the overall mix,” says Jerusalim. That said, he finds “all the wireless incumbent players are great companies with strong, positive momentum right now.”
His team has added exposure to wireless players across the board, he says, including Telus and Rogers, “as well as Shaw and Quebecor on the cable side.”
Trading on tech
Technology is also shaking up the consumer sector.
From mattresses to movies, Jerusalim says the Amazon effect continues to disrupt the consumer sector. “In our fundamental analysis, we have to parse through the business models and determine which companies are embracing change and which ones are fighting the tide — and it’s not immediately obvious,” he says.
Take Aritzia and Cineplex, two companies that have “suffered from misconceptions,” says Jerusalim. “Aritzia is not a traditional retailer because they were late to the game,” he explains. That has turned out to be a benefit, he says, because it has fewer brick-and-mortar storefronts and a greater focus on online sales, but it seems investors haven’t caught on.
“Their rapid growth is coming from the fame and popularity of many of their diverse styles and brands, and is being fuelled — not hindered — by their online presence,” says Jerusalim.
For its part, Cineplex “is diversifying [its] business to other forms of entertainment.” It owns properties such as the Rec Room, an adult arcade, and it has partnered with Topgolf, a sports entertainment company, to open locations in Canada. Cineplex has also started streaming eSports events, which are usually live video game tournaments.
Misconceptions lower the prices of these types of companies, so Jerusalim is seizing buying opportunities.
Where there’s too much uncertainty
One area of rapid change that Jerusalim is avoiding so far is medical and recreational marijuana. It’s unclear who will “carve out a successful niche and turn the hype into sustained profit,” he says, adding that “the biggest problem is a lack of competitive advantages and an ultimately commoditized product.”
He adds low barriers to entry should drive prices down to the marginal cost of production, where those who can take advantage of low-cost scale will survive. “But survival is not what satisfies investors; profits are,” says Jerusalim.
Until barriers are established and rules are defined, he concludes, “I’ll be sticking to industries with strong business models and proven profitability — like the telcos.”