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This has issues on multiple levels. They’ve had to raise capital twice in the last 12-18 months. He has a real issue with financial institutions where there is a question about capital. Looking at their lines of business, they are particularly concentrated in fixed income, relative to their peers. Not sure of being a huge fan of the high-yield area. The RNBS (mortgage-backed bonds?) space needs a very particular catalyst. RNBS is well below normal because of the function of Dodd Frank requiring banks to have skin in the game when they issue mortgages.
An equity which has a tendency to do well when resource stocks in Canada are not. Has done well because they it is perhaps the 1 out of 10 Canadian companies which is actually a good company. It’s always on his Watch List. They are producing very attractive returns and in some areas, are best in class.
Doesn’t follow this closely. Canadian operations appear to be excellent and well run and have a strong position in the market. Looking at lifecos in general, in the current environment where it is very difficult to get investors deposits in SEG funds, it is the change in interest rates that is really going to impact earnings growth. If interest rates go up, then lifecos benefit because the present value of liabilities is reduced. It also has exposure to Asia, so you have to make a call on this factor.
Merging with Essilor (EI-FP), the leading lens producer, and a lot of people view this as very positive, but isn’t sure he feels the same. Luxottica is the parent of LensCrafters, and he wonders why they would do business with their competitor. Prefers Hoya Corp (7741-JP).
Not a fan. Haven’t been able to make it clear exactly what they are trying to do. Some years their targets are gross margins, and other years it’s ROI. Thinks they are betwixt and between. Regardless of what guidance they give on capital expenditures, they are going to spend more.
(A Top Pick March 27/17. Up 22%.) This was originally Hewlett-Packard and is the original test equipment business. Very well positioned, because we have a cycle coming in communications and equipment from 5G wireless, which is just starting the ramp up of the R&D now. Also well positioned with defence electronics.
A big supplier of sand that fracers use for drilling. This is what he would put on the “too hard to understand” pile, because sand has a relatively low average selling price, which means it is very sensitive to what freight costs are for moving it. If you were to get involved, it should be relatively short-term.
An optical inspection company, which makes tools which optically inspects wafers. They are used after the chip is manufactured to verify it is within specs. They dominate the area with an 80%-90% market share, and potentially even higher on leading edge wafers. Sold his holdings this year after a very strong run, but keeps it on his watch list.
Wouldn’t bother with this. He doesn’t understand a lot of their decision-making right now. Just had their analysts’ day and have been pushing really hard to say they have to sell rail right now, when they are making it very clear to everybody that it’s the bottom of the cycle. If they have to sell those assets and are admitting it’s the bottom of the cycle, that says something about their balance sheet. If you own, he would get out.
Investing. If he doesn’t like the look of a sector, he stays out of it. There used to be the phenomena where people thought that if you picked the best house on a bad block, you’d be okay. For most of his career, that was true, but it is becoming less and less of an appropriate way of looking at things. Everybody remembers the banks and insurance companies having a difficult time during the global financial crisis. It created a tremendous opportunity within real estate, but he noticed his real estate companies were getting hurt on days when other financials were getting hurt, then he realized real estate was part of the financials. Today credit spreads are very narrow, the economy is growing very nicely, so if looking for an underperformer in an outperforming sector, is the market telling you that it is going to do poorly the next time the market corrects? Also, a lot of that is incredibly time sensitive. To him, 3-5 years is what counts.