TMX Group (X.TO)

(A Top Pick Sept 1/16. Up 19.59%.) 2015 was a dreadful year, but was one of the best performers in 2016. This year it has cooled off a little, and not sure why because the earnings growth has been pretty significant. A very profitable business. They’ve done a great job of deleveraging, getting rid of businesses that are not profitable. Expects there will be more dividend increases and a smart allocation of capital. Still a Buy. Dividend yield of 2.99%.

This owns the TSX and a bunch of data, so they make money on trading. Expects it will have a pretty good Q2 because there have been more IPOs. This is on track to earn around $4.75 this year, maybe $5 in 2018. Valuation is at 13-14 times earnings, which is very inexpensive for a company with very consistent earnings. Management has done an excellent job righting the ship. They’ve turfed a number of underperforming divisions and even raised the dividend twice in the past year. Generates an enormous amount of free cash flow. He sees upside to at least $80.

This was facing concerns about NASDAQ coming into Canada and taking some listings, but to him, this is much better than Amazon in some ways, because they have all the shoppers and they have all the products. It is going to be very hard for someone to come in and take the listings. They finally raised the dividend last year. The balance sheet is now perfect. They’ve been selling off divisions that were not profitable. The new CEO has done an excellent job. Valuation is quite reasonable when compared to other publicly traded exchanges. He thinks this is an $80 stock and could go a lot higher if we continue to see good markets. Dividend yield of 2.56%. (Analysts’ price target is $76.)

How does this make money? They make money a variety of ways. Listing fees, trading fees and fees for information. You are seeing more of a global consolidation in this industry. At these levels, he feels valuations are somewhat excessive. This has had a big run in the past 2 years.

This has been performing super strong with the markets being on a roll. Thinks this continues to do fairly well. It ranks really well in his process both technically and fundamentally. If he didn’t own it, he would certainly look at it.

Believes this reports tonight. It has been a top performer this year and is up about 70%. He owned it last year when it was down 50%. Very volatile. It is commodity sensitive. A wonderful, capital, compounder that generates a lot of free cash flow. It’s balance sheet is being masked to fight off the London Stock exchange acquisition a few years ago. Generating infinite return on invested capital. Tremendous management. Earnings are going to be volatile from quarter to quarter, but if you look over a multiyear period, they are doing a good job. He expects to see a dividend increase very shortly. Trading at a material discount to other global exchanges. Trading at 14X forward earnings. 2.6% dividend yield. His FV is $75 a share.

Some big investors recently cashed out, which gave him an opportunity to buy more. It is a network business, an exchange. A monopoly generating about 75% revenue from trading, and 100% of revenue from listings. It has a fixed cost operation, so as trading increases, there is more listings. As the market goes higher, all of that falls to the bottom line. That happened in the last quarter, and more of that will continue as the market improves. Thinks there is opportunity for it to trade at a 16 or 17 times PE. Dividend yield of 2.81%.

There is more competition coming with NAXDAQ Canada. At some point it may be attractive. He does not hear talk of the takeover. There are lots of things with more growth, same dividend.

During the year, many times it hit around the $45 level. Took a big drop in December. If it broke below the $34.72 level, there are probably going to be some new lows made.

There are fears that the big US guys are coming over and beating them up and taking over. The higher-ups in the company are denying that that is a possibility. There is some support that was pretty dominant in the low $40 or so, and that looks like it was broken as it is falling like a rock. When it starts consolidating, that is a sign that maybe the end of that trend is over. He would avoid this for the time being.

This is a little volatile because there is not a lot of float out there. If you look at the holders, it is pensions and banks, so the amount of floating stock is very little. The valuation is much cheaper than the other North American publicly traded exchanges. Spitting out tons of free cash flow. There is potential for a dividend increase. He doesn’t view this as a financial, but as an annuity revenue stream technology company at a very reasonable valuation. His Fair Value price target is about $75. This is a show-me story and they have to deliver over the next 2 years.

The 1^st quarter has not been great in terms of trading, but this is not just a trading company. There are listing fees, advisory fees, and technology fees. Listing fees have been huge recently because there have been a lot of preferred shares and secondary offerings for oil and gas companies that need the money. He is hopeful that there will be more IPOs. Trading at around 12 or 13 times next year’s earnings. Dividend yield of 3.04%, which is the highest dividend yield relative to its US peers.

He is in the middle of researching this. Hasn’t owned it lately because he was very concerned about the fractionalization of the stock market. The old monopoly of 1 stock getting all the business has eroded. He is more attracted to it at this price than he was at $60 a share.

Came off its peak mid-2014 and dropped down to an area where there were a couple of peaks. Looks interesting. Some indicators are up and some indicators are down. There is no rush to go out and buy this. Around $46 would be an interesting area. Really a non-issue now.

3.25% bonds maturing Oct 3/18. One of the themes in his 3 picks is quality. He is taking cautionary measures to guard against BBB bonds starting to underperform the market. Also, preservation of capital in these very low rates is #1 in his mind.