Rogers (ROG) And TELUS (TU) Seen As Top Telecom Stocks To Own; Senior Vice President Of Canadian Equities Picks Them As Winners
March 1, 2010 - The Wall Street Transcript has just published Investing in Canada Report offering a timely review of the General Investing sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Mark D. Thomson is the Senior Vice President of Canadian Equities at Beutel Goodman & Company Ltd. He joined Beutel Goodman in 1989 and has over 25 years of investment experience. He is the Director of Research, and is responsible for oversight of the global equity research process, and a portfolio manager who leads the Canadian Equity Team. He is also a member of the BG Management Committee and sits on the Board of Directors. Prior to joining BG, Mark was a portfolio manager at Pemberton Securities. Mark is a graduate of Mills College and is a CFA charterholder.
TWST: What about your weightings, where are you most exposed, and where are you underexposed in your weightings?
Mr. Thomson: We are 13.5% underweight Materials. In the case of Consumer Discretionary, however, we are approximately 500 basis points overweight. The overweight is primarily due to Quebecor (QBR.B), which from our perspective should more appropriately be classified in the telecommunications group. We are also very heavily overweight, to the tune of 500 basis points each in Consumer Staples, Telecommunications and Financials.
Approximately 94% of our portfolio, by weight, is comprised of free-cash flow generating companies which, from our perspective, provide a high quality skew relative to the S And P/TSX. The portfolio, both in aggregate and in individual names, is valued significantly below the market using standard metrics such as P/Es and price-to-book multiples.
TWST: Are you underweighted in technology and healthcare?
Mr. Thomson: Very under weight, actually zero. Information technology is primarily Research in Motion (RIMM), which accounts for 3.5% of the Index, Healthcare is less than a 1% weight. Unlike the U.S. where you have big drug companies and healthcare providers, in Canada, this sector is primarily comprised of businesses with less predictable cash flows.
TWST: What are some of the companies that you can tell us about that you feel are representative of your investment approach, you mentioned Quebecor earlier?
Mr. Thomson: At the time of purchase, Quebecor was very much out of favour and the market had questions about management. The company has a very stable cable business, trades at a very low valuation, has a decent balance sheet and the operating outlook over the next three years is positive. If you want to look at our big positions, we have a large weight in TD Bank (TD). We like the bank due to its risk averse culture, strong retail focus, and presence in the U.S. The latter position is largely the reason that TD has a low valuation. The company has performed very well in the U.S. and if you look at their loan losses relative to peers, they have been very successful.
The U.S. has witnessed a significant decline in competition, which from our perspective, is ultimately going to be very profitable for the surviving entities. The second name we like on the banking side would be CIBC (CM). This is more controversial as CIBC has historically tended to exposed themselves to inordinate risk. Despite this, we are attracted to the high percentage that the retail franchise contributes to the bottom line. Our view is that the risks are more than priced into the current stock price, and we think the company is well positioned going forward. We also have a significant exposure to the Canadian insurers, which like their global peers, are trading at close to book value, have very low earnings multiples and, unlike their peers, have decent dividend yields.
Another stock we like is Molson-Coors (TAP), which is not technically part of the S And P/TSX Index, but is trading at a very low double-digit multiple of earnings, is a significant free cash flow generating business, and trades very close to book-value. We think it is the type of stock that has been out of favour because investors are looking for earnings momentum and economic sensitivity. We think the company is very interesting, not only on the context of its valuation, but its position in a global industry that is consolidating at a rapid rate. We like the telecommunication stocks, which are cheap on a global basis.
We have two names of significant size in the portfolio; one of these is Rogers (ROG), and the other is TELUS (TU). Both have high exposures to wireless, which in Canada is a un-penetrated market compared to many foreign countries. Current concerns regarding new competition, which we view as more noise than reality, has taken the stock prices down to levels where they are trading at close to trough EBITDA multiples.
TWST: What about your energy stocks?
Mr. Thomson: We focus on the names that are relatively low cost providers in an industry that is high cost on a global basis. As such we would focus on names like Cenovus (CVE), which may not have exceptional leverage to the upside if oil prices spike, but has significant upside in a robust price environment and at the same time provides protection on the downside if prices decline.
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