An ‘old school’ manufacturing stock and a ‘new age’ technology stock may seem like an odd couple for a ‘2 Best Buys’ story in Investor’s Digest of Canada. But here’s an experienced analyst who advocates choosing stocks of established, well-run, profitable businesses across a variety of sectors.
Rob Panes, director, wealth management and also a portfolio manager at Richardson GMP in Toronto, has worked in the investing industry for 35 years. Over the decades, Mr. Panes has formed some clear ideas of what works and what does not in the market.
Mr. Panes says that when searching for new additions to his clients’ portfolios, he considers “no turnaround situations, no fallen angels, no start-ups.” Instead, he simply looks for established, well-run, and profitable businesses across a variety of sectors, picking one or two of the best in each.
Aside from those fundamental qualities, the portfolio manager says he checks for catalysts that could drive companies’ share prices upward, rather than “parked cars” that are decent businesses but unlikely to demonstrate their worth to the market.
Mr. Panes argues that buying and holding quality stocks is the best investment strategy investors can employ in response to years of market uncertainty due to global economic issues such as Greece and Brexit. He adds, “I’m certainly not a believer in market timing so I am fully invested all the time.
“We never say, boy it’s too expensive, we need to go to cash.”
By using a sophisticated computer program to single out potential portfolio additions, and then thoroughly vetting the picks as they stand in the real world, Mr. Panes finds strong prospects among manufacturing stocks and technology stocks.
New Flyer, old industry
Mr. Panes’s first ‘best buy’ selection, manufacturing stock New Flyer Industries Inc. (TSX—NFI), is North America’s number 1 transit bus and motor coach manufacturer as well as bus parts supplier. It does more than half of its business in the U.S. and the remainder in Canada. The company produces a variety of buses using all manner of fuels.
Applying his stock-picking criteria, the portfolio manager lists several catalysts for New Flyer.
Firstly, the company made a “transformational” change when it bought MCI, or Motor Coach Industries, last year.
MCI manufactures larger motor coaches used for intercity travel by bus lines like Greyhound and commuter transit services, such as Ontario’s GO Transit. Meanwhile, New Flyer produces municipal buses that travel within towns and cities.
Both are based in Winnipeg. Thus, the two do not compete for customers because they serve different markets but have nevertheless begun to enjoy improved operating and management efficiency as a combined manufacturing company in 2016.
Secondly, the replacement cycle for public transit has reached a very favourable place for manufacturers.
Following the 2008-09 financial crisis, many North American municipalities froze capital spending on public transit but they can no longer wait, Mr. Panes points out.
“Those buses are now very old. It’s not if, it’s when.”
Finally, New Flyer is currently delivering buses for contracts signed before 2013. Those contracts are being replaced by much better contracts with high margins, says Mr. Panes.
This year, the transportation equipment manufacturer expects to sell more than 3,450 new buses in addition to 350 pre-owned buses. He points out that sales continue to rise, as evidenced by the company’s rapidly growing list of orders. “They’re right now at the highest book-to-bill ratio they ever had,” he says. At the end of 2016’s first quarter, New Flyer’s order backlog was worth $5 billion. By the end of the second quarter, the backlog stood at $5.25 billion.
Big data company shoots for the cloud
The portfolio manager’s second ‘best buy’ pick operates in a much newer (and less tangible) field. Technology stock Open Text Corp. (TSX—OTC; NASDAQ—OTEX) manages companies’ ‘big data’ (large sets of documents and other information) and accompanying analytics in order to streamline work-flows.
For example, if a large pharmaceutical company wanted to develop a new cholesterol-fighting product, Open Text would keep track of what documents need to be sent to regulators, how long the company needs to hang on to records, and any other relevant information, Mr. Panes explains.
This application software and computer systems design services company is truly a global stock, boasting offices in Canada, the U.S., Middle East, Africa, and Europe, and operates in a rapidly growing field, he says. Its earnings have risen 21.5 per cent on average for the last five years.
The portfolio manager lists four sources of growth for Open Text: Blue Carbon, a leading-edge, cloud-based document management system; overall cloud service expansion; the acquisition of Actuate in January 2015, an analytics company, to expand that arm of its business; and additional strategic acquisitions. (Open Text has already made two acquisitions in 2016).
Investor’s Digest of Canada, MPL Communications Inc.
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