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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
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