(Runtime: 3 min, 53 sec; size: 3.12 MB)
Craig Jerusalim, senior portfolio manager, Canadian Equities at CIBC Asset Management.
I have three high-conviction recommendations that I would like to discuss. The first is a long-term core holding that consistently delivers on their strategy. I’m referring to Intact Financial, Canada’s largest property and casualty insurer, who has a stated goal to out-earn their industry peers by over five percentage points due to their dominant scale and technology leadership competitive advantages in Canada. As the market leader, Intact has directly and indirectly benefited from ongoing industry consolidation demonstrated by the return of industry pricing power, often referred to as a hardening market.
Intact recently acquired two leading specialty insurers, The Guarantee Company and Frank Cowan Company, whereby Intact should be able to considerably increase profitability through stronger underwriting capabilities, broader distribution networks, and lower cost structure. Additionally, with their recent equity issuance, Intact’s strong balance sheet positions them well to continue making opportunistic tuck-in acquisitions, both in Canada and south of the border.
The second company I want to highlight is slightly riskier but has the potential for a much greater payoff. Kinaxis is a mid-cap Canadian technology growth company that offers SaaS software as a service for supply chain planning. Their best-in-class product offering allows their customers to anticipate complex demand requirement, performs scenario analysis in real time and optimize their customers’ global supply chain planning. Kinaxis trades at a 40% discount to SaaS peers but valuation is not a good reason to buy a growth company, only growth is. And Kinaxis should be able to re-accelerate their growth through their announced partnerships with global consulting firms like Accenture, Deloitte, and most recently Infosys. And unlike many other high growth tech companies, Kinaxis is already profitable today even as their growth begins to re-accelerate.
The final topic is Cargojet, who just announced a strategic alignment with Amazon to work towards owning 15% of Cargojet over time. Cargojet dominates overnight cargo delivery in Canada. With 95% market share, they’re a virtual monopoly and demonstrate strong pricing power, so long as their high service levels remain best in class. They’re fully levered to ongoing e-commerce growth, and investments they’ve made to date set up impressive operating leverage in their business. Their business benefits from adding additional flights to existing routes as well as the move to seven days per week, all within the very limited additional capital expenditure.
There are very high barriers to entry due to scale and first-mover advantage, and the company has built a very attractive pass-through mechanism to deal with volatility in fuel, weather, and pilot costs. The upside for Cargojet comes jointly from rapidly growing earnings and free cash flow, as well as multiple expansion commensurate with other high quality oligopolies such as the rails or regulated pipelines.
All three of these companies can fluctuate in the short term and be whipped around by market sentiment. However, high-quality business models, product offerings, and strategic market positions set them all up for long-term success.