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Stock Opinions by Chris Hensen

N/A

Markets. Not surprised by the current volatility. We were in a low volatility environment for a period of time, but it doesn’t concern him. It gives a lot of opportunities to own some very good names. He just maintains focus on buying high-quality businesses and building a high-quality portfolio. As the opportunities come along, you are either adding to positions, or establishing new positions with companies where you have been waiting for the right price levels.

Unknown
PARTIAL BUY

A great company with a great management team. With names like this that have done really well, he’ll start off with a smaller position, and if the name sells off, he adds to it. If it does very well, then you just trim back.

management / diversified
COMMENT

Going through a transition right now. Sold off their credit card business and are focusing more on the industrial side. There is cost-cutting, buy back and they are aggressive with the dividend. If it were between $15 and $20, he would be an aggressive buyer. At these levels, with 6%-8% EPS growth and a dividend yield of around 4%, you are looking at a return of 8%-12% going forward.

electrical / electronic
BUY on WEAKNESS

Very strong auto parts manufacturer. Doesn’t see a tremendous amount of upside in the stock. In the near term there is going to be some choppiness with the monthly sales numbers, which might give you better entry points.

Automotive
BUY on WEAKNESS

All the telecoms seem to be doing well. He is more favourable to Rogers (RCI.B-T) at this time, given the valuation relative to Telus (T-T) and BCE. You can’t go wrong with this company, but at this level he doesn’t see a tremendous amount of upside. They are doing the right things by taking excess cash and buying back stock and increasing the dividend.

telephone utilities
COMMENT

A really strong retailer in the Canadian marketplace. Not too sure if they will really benefit from Target (TGT-N) leaving as they didn’t seem to get hit while it was in Canada. They are well-balanced across a number of their different platforms. Looking at the valuation relative to its level of profitability, he doesn’t see a lot of upside. He would want to be buying in the $90s and selling in the $120s.

specialty stores
COMMENT

Operating margins last quarter had a 600 basis point improvement. If he compares that to Canadian National (CNR-T) there is some room for further operating margin expansion, but we are in the later innings of that game. Lower energy prices is a positive. Oil shipments may decline, but they will pick up in other areas. Fairly valued at this level. Anything under $200, there is upside.

Transportation
COMMENT

John Chen had been put in place to turn the company around, and the big shareholders are going to give him leeway. Has brought costs down from a quarterly run rate of $2 billion down to $500 million a quarter. They are re-launching products and hopefully they’ll get some traction there. Expectations are very low and the market share is very low, so there is some room for some improvement. Trying to transition more to a software business and away from handsets, but that will take time. As they refocus on the mobile device management segment in corporate enterprise over the next 2 years, we should see the benefits. The last 3 quarters have been free cash flow positive.

electrical / electronic
PAST TOP PICK

(A Top Pick Oct 20/14. Up 20.87%.) Have done a great job of leveraging the balance sheet, making strategic acquisitions, doing strategic spinouts, buying back stock and increasing the dividend. Since he picked this, same store sales are accelerating. They have a full integration of Safeway, so there are a lot of cost synergies. At these levels, he doesn’t see as much upside as before, but wait for the right entry point.

food stores
PAST TOP PICK

(A Top Pick Oct 20/14. Up 7.45%.) This industry is highly consolidated and this company controls 40% of the global ratings. They do 45% EBITDA margins. Putting that into context, the other 200 largest companies in the US have an average EBITDA margin of about 25%. This is a business that can increase prices every year. In the last couple of quarters, they announced an additional $1 billion buyback and increased the dividend by about 20%.

Financial Services
TOP PICK

(A Top Pick Oct 20/14. Up 23.64%.) The King of the food courts. Dominant franchises within the quick serves. Have been doing some acquisitions which will grow the top line by about 25%. Have about a 3% market share in Canada, and he could see them doubling that. Could see them doubling their revenue base over the next 7 years. Yield of 1.12%.

food services
COMMENT

If the Canadian economy slows, it makes people a little concerned going on from here. Any time you have a bit of a blip in respect to credit related to the banks, it is sort of exacerbated. As a shareholder, you are not going to get hurt like you would in the US, but you can definitely feel it. He is a little concerned because the credit cycle has been very favourable for a long period of time. It is a cycle and it does come back. He is generally underweight banks and would want to wait before getting a little more comfortable.

banks
COMMENT

If the Canadian economy slows, it makes people a little concerned going on from here. Any time you have a bit of a blip in respect to credit related to the banks, it is sort of exacerbated. As a shareholder, you are not going to get hurt like you would in the US, but you can definitely feel it. He is a little concerned because the credit cycle has been very favourable for a long period of time. It is a cycle and it does come back. He is generally underweight banks and would want to wait before getting a little more comfortable.

banks
WAIT

A high-quality Canadian name. Have done an outstanding job with acquisitions in Norway and just did a deal in the US. There is further ground for them to cover to do acquisitions in Canada and the US. They are a natural buyer as they have the balance sheet and can take on the leverage and are great at integrating. Thinks the recent spike is because of a lot of investors were seeking safety after moving out of energy. Over the long-term he doesn’t think you can go wrong, but pick away when it has a bump. At this level he doesn’t see a lot of upside.

food stores
COMMENT

This was the old Tim Hortons along with Burger King. He doesn’t see as much upside at this level and is going to wait and see how the next couple of quarters pan out. They are leveraged to a turnaround here.

food services
COMMENT

Suncor (SU-T) or Husky(HSE-T)? Over the long term within energy, you want to own the high-quality names. He likes this one with its vertical integration. They have one of the best refining and marketing businesses in Canada. However, there have been some problems with their oil sands projects. His choice would be neither. He prefers Imperial Oil (IMO-T) over the long-term, because by far they are the best operator with the highest returns.

integrated oils
COMMENT

Suncor (SU-T) or Husky(HSE-T)? Over the long term within energy, you want to own the high-quality names. This company has done a pretty good job. Vertically integrated. Slipping up on their oil sands as there is some International exposure. His choice would be neither. He prefers Imperial Oil (IMO-T) over the long-term, because by far they are the best operator with the highest returns.

oil / gas
BUY

This is by far the best operator with the highest returns. While others were cutting dividends and slashing CapX budgets. This one did not cut its CapX budget. It has one of the highest and most stable ROE’s out of all the energy companies in Canada.

integrated oils
COMMENT

Very attractive dividend yield and a very stable business. Management has done a tremendous job over the last 5 years, transitioning from an old checking business to providing banking technology solutions, lending and payment solutions across North America. They have done a number of acquisitions. Have grown and compounded EBITDA by 18% over the last 5 years. At this level, the stock is not cheap. Doesn’t see a tremendous amount of upside, but he will continue to hold.

other services
COMMENT

This basically owns auto dealerships across Canada, and their growth strategy is basically rolling up dealerships. Overexposed in Western Canada, so there could be a big slowdown there. He can see it continuing to be under pressure until there is more visibility on what is going to happen out West.

specialty stores
BUY on WEAKNESS

This is a true organic growth story, not an acquisition rollup story. They are really dominating the $1 space in Canada. A high-quality business that has a lot of room for further growth. Doesn’t see a lot of upside at this level. He would rather get it at 15%-20% lower from here.

Consumer Products
COMMENT

They have the dominant share in search and online advertising. Have invested a tremendous amount of money in the business. $35 billion in CapX and acquisitions over the last 3 years, and he is not sure that he can see the benefit of that. EBITDA margins have come down over the last few years as the business mix is shifting. The momentum behind desktop search is slowing somewhat. It is more the mobile search and mobile advertising that has the advantage.

Business Services
TOP PICK

Because of the recent volatility and lower energy prices, this company got hit. Most recently they had to cut their build rate from 3 to 5 trucks to a lower level, to account for the slowdown they are seeing out West. Their exposure to oil sands is about 15%. Energy end market exposure is around 50%, but this is more about large pipelines that are in the ground and active, regardless of what the price of oil does. On top of this, their expansion opportunities in the US are 5-10 times greater than in Canada, and they are starting to gain more traction in the US marketplace. They are able to redeploy their hydro-vac trucks in other regions, where there is demand. 1.45% dividend yield.

oil / gas
TOP PICK

This recently traded below Book Value. This is one of the largest commercial real estate operators in Québec. $8 billion portfolio, 75% exposed to Quebec, and the rest to Ontario, Maritimes and a little bit out West. Trading at Price to Book of around 1 and paying a dividend yield of 7.59%, and he doesn’t feel you can go wrong.

investment companies / funds
N/A

Markets. Buys businesses that generate high returns over a period of time. His value-add is just buying good businesses. He worries top down and invests bottom up. He is seeing opportunities in the market since the recent correction. He has been waiting for the valuations of certain companies to come down. He has been adding to some positions over the recent volatility. He expects volatility to remain as global economies continue to diverge.

Unknown
WATCH

It is a really good business. Generates very high levels of return. Does not know when hedge funds might sell this company. There may be some short term disruptions due to this. He does not see a lot of upside in it, but with volatility he would want to add to it (say a 25% pull back)

Transportation
BUY

They are a pioneer of the business. Their edge is that they manufacture the trucks. They were ramping up their manufacturing due to demand until last quarter when they said they would take it down from 5 trucks to 4 trucks per week. This took the momentum off the stock. But management is managing supply with demand so they don’t flood the market and bring down their daily bill-out rate. Buy it here for upside within a couple of quarters of about 30%. They manage the supply side of the business which he likes.

oil / gas
PARTIAL SELL

Canadian Banks. He does not own any in his focus fund. If you have a big weighting in banks, it is risky. He is concerned about the amount of leverage they have on the balance sheets. It would exaggerate any slowdown in the next few years. He thinks earnings will slow over the next year, so take some profits.

Unknown
BUY on WEAKNESS

Owns in his income funds. Management have done well in deploying their capital. They have a good long term track record. Good dividend growth.

Financial Services
BUY on WEAKNESS

It has done a great job since the 2008 selloff. One of the most diversified auto parts sellers. The opportunity for growth is in China. They are going to turn around their European operations where they have lower margins. He likes what management is doing with capital. They bought back close to $2 billion in shares. He sees an 8% return so he would add to a position at a lower price point and hold for the long term.

Automotive
WATCH

Earnings last week beat expectations. Has the highest organic growth rate when it is one of the world’s biggest companies. The new GE is totally different than the old one. They are deemphasizing financial services. They will split out the rest of it next year. Likes what management is doing. They are focusing on business that don’t need as much capital. He doesn’t see a lot of growth relative to the stock price. At the end of the day it is a great business. He just can’t pay up for it at this level.

electrical / electronic
WATCH

There is no way to know where the oil price will go in a couple of years. It is hard to invest in this area. It is a high cost producer with the majority of assets tied up in the tar sands so when oil sells off it gets hit more. But he likes their integrated structure with the upstream and downstream. He just doesn’t see a lot of upside here. He would like to see it a lot lower before adding to it.

integrated oils
WATCH

They see slow spending from businesses. Likes what they are doing increasing dividend and buying back stock. He doesn’t like the price when he marries it with the growth potential. Wait for lower prices (teens).

electrical / electronic
SELL

There are interesting dynamics in the space. Are the regulators going to let in a 4th service provider? He owns RCI.B-T. They will all grow about the same amount. Likes the media and broadcasting assets of Rogers. Telus lacks this. He doesn’t see any upside to this one. He would swap out of T-T and into RCI.B-T

telephone utilities
BUY on WEAKNESS

He does not own any of the banks in Canada or the US. A lot of the banks delivered significantly. WFC-N survived. It is probably one of the best managed banks over time. They compounded their book value per share 11%. Returns will be lower because leverage has come down. They are buying back stock and increasing the dividend, but he shies away from the banks. He likes that they are retail funded rather than wholesale. You may want to add to the position on a pullback.

banks
SELL

He is confident the deal will get done. This is a great business. He sold it, but was upset because it was a great business. He wants to see more evidence of what management is going to do now. There is a great opportunity to take this brand global. The US business has not been generating the return they thought it would. He is now interested in DOL-T.

food services
BUY

They have a tremendous record over the last 15 years. They have very low costs (about $10) and so generate great profits. They have one of the best production profiles coming on over the next 10-15 years. They are very patient with their capital allocation. Probably one of the best managed oil companies in the world.

integrated oils
BUY on WEAKNESS

A great business. They dominate the dollar segment. 900 stores. They will add 80 a year and there is a potential for a lot of stores. Their inventory system is impressive. Very high levels of return (20-25% ROE). The valuation is up there for a reason. There is some good upside over a long period of time. Add to it if it pulls back. It is in his top 10.

Consumer Products
BUY

Don’t make it a big part of your portfolio. He is a large shareholder and he also owns the debt. He is confident in the turnaround and that they will leverage the assets. They should turn a profit next year.

electrical / electronic
TOP PICK

Has been around for a long time. They are Thai Express, Mr. Sub, Jugo Juice and Extreme Pita. They have close to 30 brands in their portfolio. They have done a fantastic job growing the business. He sees this as a tremendous opportunity. They can double their revenues in the next 7 years as they roll out into the US.

food services
TOP PICK

Credit/debt rating agency. Control close to 40% of the market. You can’t issue debt without a rating. A lot of their revenues are recurring in nature. They buy back stock as well.

Financial Services
TOP PICK

Just purchased Safeway. Control close to 20% of grocery business in Canada as well as owning Crombie REIT (CRR.UN-T). They compounded share growth at 10% over the last 10 years.

food stores
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