Buying into a downtrodden, neglected Cinderella stock before it turns into the enviable, desirable belle of the ball is the definition of good investing. Toronto analyst Mike Vinokur singles out two such companies—both conglomerate stocks—that are highly reputable and well-established, yet somewhat forgotten next to flashier names, as ‘best buys’.
Mike Vinokur is vice-president and portfolio manager at Trapeze Asset Management. He says of his first ‘best buy’ pick, conglomerate stock Power Financial Corp. (TSX—PWF): “The company is doing very well although you wouldn’t know it by the stock price.”
The financial power of Power Financial
Power Financial consists of three main divisions: Great-West Lifeco, IGM Financial, and Parjointco.
IGM Financial in turn is made up of Investors Group, Mackenzie Investments, and Investment Planning Counsel. Great-West Lifeco operates life insurance and financial segments with international reach. Parjointco’s main holding is Pargesa Holding, a European venture with equity stakes in many types of European companies, including concrete firm LafargeHolcim. Despite the range of businesses Power Financial is involved in, Mr. Vinokur says, “Mainly, today, their business is financial.”
The analyst admits that the stock has performed poorly over the last two years, absorbing its fair share of ups and downs through that period (although the trend has generally been one of decline). “If you bought it in the summer of 2014, then you’re still at potentially a small loss, even after accounting for the dividend,” he says.
Mr. Vinokur asserts that Power Financial’s true financial power becomes clear when looking farther back and the company’s long-term shareholders have “been rewarded quite tremendously.”
For example, back in 2000, the stock dipped to a low under $10, to say nothing of the company’s dividend payouts, which have increased at least once a year since 2005.
Asked what has kept Power Financial’s share price down, Mr. Vinokur replies: “Holding companies have tended to trade at a fairly steep discount, for better or worse.” Nevertheless, he sets a target price of $38 a share. “We believe that you get a five per cent yield and you get an upside of up to 20 per cent and that’s if it still trades at a 14 per cent discount to net asset value (which is the historic average discount),” Mr. Vinokur explains.
In addition, the analyst praises the company’s careful management under the controlling Desmarais family and expects that their steady hand will keep the business strong and growing, making it one of the best conglomerates to invest in now.
He notes that low interest rates have bitten into Investors Group mutual fund redemptions and life insurance margins.
Power Financial has responded to those effects and emerging trends in the financial industry by starting its own exchange-traded fund (ETF), investing in the Wealthsimple robo-adviser, and beefing up its CFP (certified financial planner) staff.
Once the U.S. Federal Reserve raises interest rates, as is widely expected, profits from life insurance operations in the United States should rise on higher net interest margins, Mr. Vinokur predicts.
Given lower uncertainty surrounding rates, Power Financial’s assets under management should rise as well, the analyst adds.
A boringly consistent money-making conglomerate stock
Mr. Vinokur’s second ‘best buy’ is also a holding company, and arguably one with an even better pedigree than Power Financial and the Desmarais family: Berkshire Hathaway Inc. (NYSE—BRK.B). The analyst says the Warren Buffett-led company is “perhaps boring” but adds that it remains “extremely well-run” and “generates tons of cash flow”.
“Part of our attraction is that the stock trades at approximately 1.2 times book,” he explains, close to the level at which Mr. Buffett himself has said he would buy back shares at about 20 per cent. “In other words, book is going to grow,” says Mr. Vinokur.
At present, this top conglomerate stock holds a staggering $150 billion in cash and securities, meaning that whatever strategic moves its leadership wants to make are actually possible. Mr. Buffett’s record in this regard, of course, precedes him. The company’s diverse product range across businesses and geography provide stability as well.
Based on its component companies, which include massive firms like Burlington Northern and Precision Castparts Corp., Berkshire Hathaway’s B class shares are worth about US$180, offering at least 30 per cent of upside, according to the portfolio manager.
Investor’s Digest of Canada , MPL Communications Inc.
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