I add another Canadian company to the Model this month. Canadian stocks are more undervalued than U.S. stocks, and the Canadian economy is now improving noticeably for the first time in a long while.
Cabot Benjamin Graham Enterprising 278E
Benjamin Graham is called The Father of Value Investing. His influence has inspired many successful investors, including Warren Buffett.
[premium_html_toc post_id="138367"]
O Canada!
The U.S. stock market has been overvalued for quite some time. Canadian stocks, on the other hand, have been selling at very reasonable prices, but the Canadian economy had been sputtering along with GDP growth of less than 2% for the past 30 years. Now however, Canadian growth is beginning to accelerate and should exceed 2% in 2018—making now an excellent time to add Canadian stocks to your portfolio!
In this month’s Enterprising Model Issue, I introduce another company that resides in the great country north of our border. In July, I recommended buying Canadian Tire (CTCA.TO), which has performed well. In August, I recommended Avigilon (AVO.TO) and WestJet Airlines (WJA.TO) for the first time in a while. This month, I add Alimentation Couche-Tard (ATDB.TO) to the Cabot Enterprising Model.
Why am I suddenly so interested in Canadian companies? It’s simple: the Canadian economy has improved considerably during the past several quarters, and these four companies are poised to participate in the economic resurgence in Canada.
All four companies trade sufficient volumes on the Toronto Stock Exchange. However, only Canadian citizens with Canadian brokerage accounts are allowed to trade on the Toronto exchange.
U.S. investors can buy and sell Alimentation Couche-Tard, Canadian Tire, Avigilon and WestJet Airlines on the U.S. Over-the-Counter market using the symbols: ANCUF, CDNAF, AIOCF and WJAFF respectively. You need to be aware that most Canadian stocks trading on the U.S. Over-the-Counter market are thinly traded, so I advise using limit orders and buying or selling small amounts at a time.
“Buy into a company because you want to own it, not because you want the stock to go up.” —Warren Buffett
Cabot Enterprising Model
My Enterprising Model comprises 16 stocks which I have selected by using one of six analyses: Undervalued Canadian, Classic Value, Graham Buffett, Low NCAV, Low P/BV and Low PEG. The Model is well-diversified, represents many industry sectors, and is composed of the stocks of undervalued companies that are expected to produce consistent growth. The analysis used to select the Enterprising Model stocks is included in each summary and in the Analyses table below. For additional details, please email me at roy@cabotwealth.com.
Usually stocks in the Enterprising Model are purchased at their current prices, but because of the current stock market volatility, I now recommend that Enterprising Model stocks be purchased at or below my Maximum Buy Price. Enterprising Model stocks should still be sold using my Minimum Sell Price. For an explanation of how my Max and Min Prices are calculated, you may email me at roy@cabotwealth.com.
Model Buy Recommendations
The Enterprising Model contains 16 stocks with three new stocks: Alimentation Couche-Tard (ATDB.TO), Five Below (FIVE) and Stifel Financial (SF). Three stocks transition out of the Model: Biogen (BIIB), Spectra Energy Partners LP (SEP) and Triumph Group (TGI).
Biogen, Spectra Energy Partners LP and Triumph Group are now listed in the table of Hold and Sell Recommendations. These three stocks remain excellent investments, and you should continue to hold them. Keep your “Hold” stocks until your selection reaches its Min Sell Price, at which time I will issue a sell alert by email, in the Value Investor or Enterprising Issue, or in the Weekly Update. I will also indicate that you should sell when a disappointing performance or adverse condition affects any company.
Currently two stocks in the Cabot Enterprising Model are priced below their Max Buy prices. Before buying Enterprising Model stocks, you should wait until the price of the stock decreases to or dips below its Max Buy Price.
Because I use six different analyses to find stocks for my growth-oriented Enterprising Model, these stocks are quite different from the stocks in my conservative Cabot Value Model. I base my choices for Enterprising stocks on favorable shorter-term market and sector trends and find a variety of stocks in many sectors. In addition, I have not applied my defensive risk allocation, which I apply to my Cabot Value Model, because the objective of the Enterprising Model is to provide choices to help you diversify your portfolio. Enterprising Model stocks carry more risk than Cabot Value Model stocks.
Alimentation Couche-Tard (ATDB.TO) Industry: Consumer Staples–Specialty Stores; Low Risk; 0.7% Yield; Undervalued Canadian Companies Analysis
Alimentation Couche-Tard (ATDB.TO: Toronto Stock Exchange Current Price 59.46 Canadian dollars; ANCUF: U.S. Over-the-Counter Current Price 47.78 U.S. dollars) is a Canadian company established in 1980 with headquarters in Laval, Quebec.
Alimentation Couche-Tard, or simply Couche-Tard, is the leader in the Canadian convenience store industry. In the U.S. under its Circle K brand, the company is one of the largest independent convenience store operators. In Europe, Couche-Tard is a leader in convenience store and gas station retail in the Scandinavian countries, the Baltic States and Ireland. In addition, under licensing agreements, 1,700 stores are operated under the Circle K banner in 13 other countries worldwide, which brings the total network to 15,000 stores.
On June 28, Couche-Tard completed the $4.4 acquisition of CST which owns and operates 2,000 locations in North America. CST operates convenience stores and gas stations in eastern Canada and the eastern and southern portions of the U.S. under the Corner Store and other banners. The purchase is Couche-Tard’s largest acquisition to date, and greatly expands the company’s reach in the U.S. and offers significant profitability opportunities. Couche-Tard has been very active on the acquisition front from its beginning, which has enabled the company to grow sales and earnings at a steady, rapid clip during the past 37 years. The company boasts a strong balance sheet and produces abundant cash flow.
On September 5, Couche-Tard recorded excellent quarterly results which included sales and EPS gains of 17% each. The news sent shares 3% higher. With a P/E (price to earnings ratio) of 19.1 times current EPS (earnings per share), and expected five-year earnings growth of 16.5%, ATDB.TO shares are very reasonably priced. The dividend has been increased annually during the past decade and now yields 0.7%.
I expect Couche-Tard’s shares to rise 25% and reach my Min Sell Price of 74.06 on the Toronto Stock Exchange or 59.51 on the U.S. Over-the-Counter market within two years. Buy at or below 60.81 on the Toronto Stock Exchange (ATDB.TO) or 48.86 on the U.S Over-the-Counter market (ANCUF).
Avigilon (AVO.TO) Industry: Industrials–Security Systems; Medium Risk; No Dividend; Undervalued Canadian Companies Analysis
Avigilon Corp. (AVO.TO: Toronto Stock Exchange Current Price 16.60 Canadian dollars; AIOCF: U.S. Over-the-Counter Current Price 13.45 U.S. dollars) is a leading designer, manufacturer and marketer of network-connected video surveillance systems, surveillance cameras, and video analytics (software that scrutinizes video input). Customers include police departments, schools, hospitals, prisons, airports and public transportation systems. Avigilon provides the security video systems for San Diego’s public transit system, Toronto’s Rogers Centre stadium, the entire University of Tennessee campus, the Fulton County School System in Atlanta, Georgia and many other venues. Avigilon is headquartered in Vancouver, British Columbia.
Avigilon’s research goal is to upgrade surveillance cameras to high-definition quality, enabling customers, such as retailers and governments, to protect against theft or terrorism by providing detailed images usable in court or usable by facial recognition software. The company’s cameras can identify faces and license plates from 46 meters (150 feet) away.
Management plans to continue growing sales, but with a “stronger focus” on increasing profitability. Avigilon sales have been strong during the past five years, but earnings have been lagging. Now, the company’s earnings will likely grow at a much livelier pace.
Avigilon reported stellar second-quarter results which sent shares 11.5% higher. Sales climbed 16% and EPS popped 250%. Sales received a boost from market share gains, new product introductions and broader adoption of video analytics. Research and development expenses and marketing expenses leveled off after large expenditures in previous quarters.
New lower-priced surveillance systems and reduced prices on older high-priced systems is boosting profits and providing consistent sales growth. Management’s strategy is creating noticeably more sales volume, as Avigilon begins to take significant market share from larger rivals. Avigilon’s new earnings growth path has helped propel the company’s stock price substantially higher during the past nine months and bodes well for the future.
Avigilon boasts a strong balance sheet with modest debt and strong cash flow. The current 15.1 P/E based on current EPS, is easily justified by Avigilon’s growth prospects. I expect Avigilon’s shares to rise 85% and reach my Min Sell Price of 30.68 on the Toronto Stock Exchange or 24.86 on the U.S. Over-the-Counter market within two years. Buy at or below 17.08 on the Toronto Stock Exchange (AVO.TO) or 13.84 on the U.S Over-the-Counter market (AIOCF).
EQT Midstream Partners (EQM) Industry: Energy–Oil & Gas Storage & Transportation; Medium Risk; 5.5% Yield; Low PEG Ratio Analysis
EQT Midstream Partners LP (EQM: Current Price 75.95; Max Buy Price 79.78) owns, operates, acquires and develops midstream assets in the Appalachian Basin. Midstream assets include the processing, storing, transporting and marketing of oil, natural gas and natural gas liquids. EQT Midstream operates through two segments: Transmission and Storage, and Gathering Systems. The company was founded in January 2012 and is headquartered in Pittsburgh, Pennsylvania.
EQT Midstream’s operations are primarily focused in southwestern Pennsylvania and northern West Virginia, a strategic location in the core of the natural gas shale areas known as the Marcellus and Utica Shales. This same region is also the primary operating area of EQT Corp., EQM’s general partner and largest customer. EQT Corp. accounts for 73% of EQM’s revenue. Based on its strategically located assets and its working relationship with EQT Corp., EQM has become a leading Appalachian Basin midstream energy company.
EQT Midstream is expanding access to existing and adjacent markets. The company recently began operating the Ohio Valley Connector, a 37-mile pipeline extending the company’s transmission and storage system from northern West Virginia to Clarington, Ohio. The system interconnects with the Rockies Express Pipeline and may connect with other pipelines. Management is targeting annual per unit distribution growth of 30% to 40% for the next several years.
Sales will likely advance 12% and EPS will rise 10% to $6.04 during the next 12 months ending September 30, 2018. Management expects rapid growth in 2017 and 2018, which will receive a boost if EQM’s parent company EQT Corp., acquires Rice Energy. EQT Corp. intends to sell the Rice midstream assets to EQM, which are projected to generate considerable profits.
With a P/E of 13.8 times current EPS and a PEG ratio of just 0.79, EQM shares are clearly undervalued. I calculate PEG by dividing the current P/E of 13.8 by the sum of the forecast five-year EPS growth rate (12.0%) and dividend yield (5.5%).
EQT Midstream has increased its quarterly dividend 19 times during the past five years. I expect EQM shares to rise 50% and reach my Min Sell Price of 114.14 within two years. Buy at 79.78 or below.
Five Below (FIVE) Industry: Retail–Specialty Stores; Low Risk; No Dividend; Graham-Buffett Analysis
Five Below (FIVE: Current Price 48.74; Max Buy Price 49.86) is a specialty value retailer offering merchandise marketed to customers in the U.S. The company offers products priced at $5 or below, including select brands and licensed merchandise across a broad range of categories, which it refers to as worlds: Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal.
Five Below offers a wide variety of merchandise that includes sporting goods, games, fashion accessories and jewelry, hobbies and collectibles, bath and body, candy and snacks, room décor and storage, stationery and school supplies, video game accessories, books, DVDs, and novelty and seasonal items. Five Below is headquartered in Philadelphia, Pennsylvania.
Five Below is expanding rapidly by opening lots of new stores. The company’s 2017 plans include 100 new stores that will extend into new markets, including California. In addition, TV advertising will be increased, and e-commerce on the company’s website will be enhanced.
Five Below’s sales for the quarter ended July 29 surged 29% and EPS popped 67%. Same-store sales, helped by soaring sales of fidget spinners, rose a remarkable 9.3%. Five Below opened 31 new stores during the quarter after opening 31 in the prior quarter, augmenting management’s vigorous campaign to expand quickly. The company’s store count is now 584.
For the 12 months ending July 31, 2018, sales will likely climb 19% and EPS will advance 27% to $1.84. Five Below’s outstanding performance shines in the retail sector and justifiably commands a high P/E multiple. The company is not Amazon-proof, but shoppers are attracted to the trendy bargain-priced merchandise for $5.00 or less at their favorite mall.
Five Below shares have been weak lately, mostly because the company is a retailer and investors are avoiding stocks in the retail sector. Five Below’s stock price, however, will likely climb 58% to my Min Sell Price of 76.98 during the next two years. Buy at 49.86 or below.
Stifel Financial (SF) Industry: Financials–Investment Banking & Brokerage; Low Risk; No Dividend; Price to P/BV Ratio Analysis
Stifel Financial (SF: Current Price 45.75; Max Buy Price 47.40) offers securities-related financial services in the U.S., Canada and Europe through several wholly-owned subsidiaries. One of the company’s subsidiary, Stifel Nicolaus, is a full-service retail and institutional brokerage and investment banking firm. Three other subsidiaries include Thomas Weisel Partners, a growth focused investment banking firm; Century Securities Associates, an independent contractor broker-dealer firm; and Stifel Bank & Trust, a retail and commercial bank.
The company’s broker-dealer affiliates provide securities brokerage, trading, investment banking, investment advisory and related financial services to individual investors, professional money managers, businesses and municipalities. Stifel Bank & Trust offers a full range of consumer and commercial lending solutions. Stifel Financial was founded way back in 1890 and has been headquartered in St. Louis, Missouri during its 127 years of existence.
Stifel Financial has acquired many businesses during its history. In recent years, the company purchased Keefe, Bruyette & Woods in 2013, Sterne Agee in 2015, Barclay’s U.S. Wealth Management division in 2015 and Eaton Partners in 2016. Stifel recently acquired City Financial for an undisclosed amount. City Financial is an Indiana-based investment bank, specializing in public finance and wealth management.
Stifel reported strong second -quarter results. Revenue rose 8% and EPS jumped 30%. Investment banking revenue soared 39% and asset management fees advanced 20% from a year ago. Management forecast continued success for the remainder of 2017.
Stifel shares sell at 14.5 times current EPS, and the company maintains a solid balance sheet. The company’s low 1.22 P/BV (current price to book value) is attractive. Stifel initiated a quarterly dividend of $0.10 in August, which provides a yield of 0.9%.
I expect SF shares to rise 52% to my Min Sell Price of 69.70 within two years. Buy at 47.40 or below.
Hold and Sell Recommendations
The stocks in the table below were previously recommended in the Cabot Enterprising Model and are recommended to be held until their stock prices rise to my Min Sell Prices.
Sell Changes
I have no new sell recommendations.
Buy and Hold Changes
I have five new changes:
Biogen (BIIB 315.83) Buy to Hold. Second-quarter EPS fell 15%, but management forecast a rebound for the remainder of 2017.
Five Below (FIVE 48.74) Hold to Buy. Retailer continues to post outstanding sales and earnings growth.
Spectra Energy Partners LP (SEP 44.78) Buy to Hold. First-half earnings were disappointing.
Stifel Financial (SF 50.66) Hold to Buy. Shares have retreated after rising significantly in June and July.
Triumph Group (TGI 26.00) Buy to Hold. Reported very weak second-quarter sales and earnings, forecast weak results for the next 12 months, and recently added substantial interest expense after a debt offering.
Enterprising Model Performance
Value stocks continued to underperform during the four weeks ended September 5, 2017. The Enterprising Model lost 1.57% compared to a decrease of 0.69% for the S&P 500 Index. Performance was hindered by Tech Data and Chicago Bridge & Iron. Conservative stocks in the Cabot Value Model are out-performing the higher risk stocks included in the Enterprise Model thus far in 2017.
The Model is down 0.25% in 2017 compared to an increase of 8.33% for the S&P 500. During the past five years, the Model has advanced 46.6% compared to an increase of 67.7% for the S&P 500.
Since inception on March 10, 2005, the Enterprising Model has provided an impressive return of 149.4% compared to a return of 103.6% for the S&P 500 Index.
[premium_html_footer]
Send questions or comments to roy@cabotwealth.com.
Cabot Benjamin Graham Value Investor • 176 North Street, Salem, MA 01970 • www.cabotwealth.com
Cabot Benjamin Graham Value Investor is published by Cabot Wealth Network, independent publisher of investment advice since 1970. Neither Cabot Wealth Network nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks. © Cabot Wealth Network. Copying and/or electronic transmission of this report is a violation of U.S. copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, call 978-745-5532, visit https://cabotwealth.com// or write to support@cabotwealth.com
We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to: www.surveymonkey.com/bengrahamsurvey
[/premium_html_footer]