Kevin Ford’s company doesn’t make iPhones, goose-down parkas or jet airplanes—products that are easy for investors to understand and for analysts to value. Calian Group supplies specialized systems, training and software to several sectors, ranging from the military to health care. The firm also builds satellite equipment at a factory in Saskatoon, selling its wares across North America and Europe.
Calian’s stock has traded at a modest 15 times trailing earnings recently. “I think we got a bit of a discount because of our diversity,” concedes the 55-year-old bespectacled tech industry veteran. “At some point, fundamentals will be sexy again, and I’ll be one of the top 10 sexiest CEOs.”
Amid the hottest stock run in history, there are still solid, unglamorous performers that somehow get overlooked by most investors.
Several of these companies share traits. Some are conceptually challenging, or have specialties that look risky or bewildering at first glance, such as subprime lending or making internet protocol equipment and software for broadcasters. Others produce reliable profits and share-price appreciation in humdrum but essential businesses like rental housing, iron ore mining and managing local hockey arenas.
After a 10-year bull market that’s looking long overdue for a correction, dogged value investors are searching for bargains that might provide safety in a storm. And companies like Ford’s are hidden gems ready to be found, priced well below the traditional value investor’s price-to-earnings (P/E) ratio threshold of 20. Finding them takes work, however.
To discover how the leaders of these companies have improved on traditional strategies, we searched beyond the financial statements. We called 10 of them to find out what their organizations actually do—and all were eager to tell their stories.
Nayan Sthankiya/The Globe and Mail
Calian Group Ltd.
Revenue: $343 million
Profit: $20 million
Three-year price gain: 51%
P/E ratio (trailing): 15.3
Calian CEO Kevin Ford doesn’t have a spectacular idea to sell to investors. Unlike other Canadian tech companies that grew far bigger—Nortel and BlackBerry come to mind—his firm’s business is unlikely to grab headlines. But given those firms’ gargantuan flame-outs, his approach might be wise.
What Ford’s company has are four segments, each a challenge to explain: Advanced Technologies, which makes satellite components and ground systems, primarily in Saskatoon (its clients include the European Space Agency and Sirius XM); Health, which runs clinics for the Department of National Defence (DND) and Loblaw; Learning, which provides training programs and software to the DND and other public sector clients; and Information Technology, a grab bag of consulting services for enterprise systems and cloud-based computing.
Everyone got that? Ford tries an analogy: Calian is an engine with four pistons, “and even if one goes down, I still have three driving the company.”
Founded in 1982, Calian has grown steadily and posted profits for 72 straight quarters, going back to 2001. And the company keeps investing substantially in R&D for its future—about $10 million since Ford took the helm as CEO in 2015.
Still, Calian’s stock market value has barely exceeded the top threshold for a small-cap stock recently—about $300 million. That can be frustrating. “We see people coming to IPO right now and blowing through our market cap in a couple of days,” Ford says. “We don’t do simple things. We do complex things, and we do them very well.”
Genworth MI Canada Inc.
Revenue: $680 million
Profit: $452 million
Three-year price gain: 69%
P/E ratio (trailing): 12.7
Canadian regulators have been so worried about a meltdown in the red-hot housing markets of Toronto and Vancouver that they’ve created one of the most profitable mortgage insurance sectors on the planet.
The tightening regulations have “made our business a lot less risky,” says Stuart Levings, CEO of Genworth MI Canada. The two biggest moves over the past decade were hiking the amount of capital that must be held by mortgage insurers and introducing a stress test for homebuyers in 2016, which gauges whether buyers could afford their payments under higher interest rates.
The test cut Genworth’s market by 20%, Levings estimates. But continued economic expansion, plus low and stable interest rates, have helped it resume its growth, he says. So has strong immigration.
Another very good thing for Genworth MI Canada is that mortgage insurance is not a competitive business. “It’s an oligopoly, right?” says Levings, a straight-talking accountant who’s been with the company since 2000 and was promoted to CEO in 2015.
The federally owned Canada Mortgage and Housing Corp. has about half of the market, Genworth Canada has about one-third, and the remaining 15% or so is held by Canada Guaranty Mortgage Insurance Co. “None of us wants anyone to get reckless,” Levings says. The companies compete on service and relationships with lenders, not price.
This past year, Genworth MI Canada removed uncertainty about its ownership. In 2016, a Chinese company agreed to buy U.S.-based Genworth Financial Inc., which owned 57% of Genworth Canada. But Ottawa declined to approve the change in ownership. Last August, the private equity arm of Brookfield Asset Management purchased the share instead.
The company’s share price has climbed about 15% since the Brookfield deal was announced, but Levings thinks the stock is still a bargain. “There’s absolutely more value to be had,” he says.
Brandon Thibodeaux/The Globe and Mail
Tricon Capital Group Inc.
Revenue: US$400.5 million
Profit: US$216.8 million
Three-year price gain: 9%
P/E ratio (trailing) 13.3
When veteran Toronto real estate executive and Tricon co-founder David Berman and his son Gary saw a 50% to 70% plunge in house prices in the U.S. Sunbelt during the 2009 financial crisis, they started buying in the region as fast as possible. “It’s been an amazing ride,” says Gary, 45, who succeeded his father as CEO in 2015.
Tricon raised $69 million in an IPO in 2010. From 2009 to 2012, it bought close to US$1 billion in property. The company purchased bargain-priced land to start and then partnered with local investors to buy houses for rental purposes. It bought many in foreclosure auctions held on courthouse steps. The buyers paid with knapsacks full of cashier’s cheques.
Tricon now manages about US$8 billion worth of its own houses and apartments, and approximately US$2 billion for other investors. Roughly 90% of its holdings are in the fast-growing Sunbelt, and Berman says U.S. rental demand is huge—a US$4-trillion market.
The company has even automated the house-buying process. Computers scan MLS listings every 10 minutes, run new postings through 90 criteria and can file an offer within five minutes. At that point, an underwriter will visit. Tricon buys about 800 houses every quarter this way.
As the firm hit its stride from 2012 to 2015, its share price tripled, but has since bumped along sideways. Tricon’s business isn’t easy to dissect—even for real estate investors. It’s not a REIT, and it has few marquee properties; the Selby rental tower in Toronto, opened in 2018, is probably the only one that’s recognizable. “The stock price is frustrating, but also incredibly motivating,” Berman says. “We’re, in a sense, trading at our book value, but not getting any value for the management company. Or for growth.”
Berman says expansion is inevitable: “I think we’re still in the early days of what Tricon is going to become.”
Goeasy Ltd.
Revenue: $506 million
Profit: $53 million
Three-year price gain: 198%
P/E ratio (trailing): 15.3
Does a consumer lending company with the word “easy” in its name sound like a risky investment? How about one that boasts “We say YES more than anyone else” on its website?
Jason Mullins, who’s been the CEO of Goeasy, based in Mississauga, since 2010, will disabuse any misconceptions. He has plenty of data showing his business is neither shaky nor niche. About a third of all Canadian adults are below-prime borrowers, meaning banks consider them lending risks. Many had a “credit shock” in the past, due to an event like a job loss or divorce. Yet they still have to meet pressing financial needs, from auto or home repairs to kids’ summer camps.
Goeasy has more than 400 locations across Canada and grants mostly unsecured instalment loans of up to $35,000, for terms from nine months to 10 years. They aren’t cheap—annual interest rates range from 19.9% to 46.9%.
But Mullins argues Goeasy’s loans are far better for borrowers than getting “trapped in a cycle of interest-only payments” on credit cards, or payday loans, which often lead to repeated borrowing at crushing rates. Instalments also help customers rebuild credit scores.
To limit risk, the company only approves about one loan applicant in seven. And by income and other demographic measures, Mullins says, “the typical customer looks identical to the average everyday working-class Canadian.” As a result, the percentage of loans that Goeasy writes off as unpaid is a manageable 13%, and has been remarkably stable in good times and bad.
Goeasy’s expansion has also been steady. Revenue has climbed from $66 million in 2001 to $506 million in 2018. Total shareholder return over that time is 6,559%. Yet Mullins believes there is still plenty of room for the company to grow and that the stock is “cheap relative to its potential.”
Courtesy The Royal Canadian Mint
Royal Canadian Mint Gold ETR
Revenue: n/a
Profit: n/a
Three-year price gain: 28%
P/E ratio (trailing): n/a
Gold bullion has been a store of wealth for millennia. And buying from a government mint seems like an obvious way to acquire it. Yet the Royal Canadian Mint, which stores and refines the precious metal—and sells a wide range of collectibles—was slow to see the opportunity in serving investors. But in 2011, the Mint introduced bullion exchange-traded receipts (ETRs), which allow the purchase of bullion that is then stored in its vaults.
Norman Toye, the president of the Mint’s ETR program, says timing was a big factor. Bullion prices soared to an all-time high of close to US$1,900 an ounce that year, but there were just a handful of large North American bullion exchange-traded funds, including the giant SPDR Gold Trust, based in New York, and the half-century-old Central Fund of Canada. The price surge stoked investor interest, and the Mint raised $600 million in an IPO of its ETRs. “We kind of timed it to the top of the market,” says Toye.
But bullion prices then sank and drifted sideways, before starting to rise again in 2018. Bullion ETFs have outperformed many gold stocks, and the Mint’s ETRs have beaten its rivals’ recently, including the Sprott Physical Gold and Silver Trust (which bought the Central Fund in 2018) and the iShares Gold Bullion ETF.
There’s also a technical difference: The Mint’s ETRs give buyers titles to bullion, while competing funds’ units are shares of an entity that holds bullion. That said, you need to hold at least 10,000 ETRs from the Mint to cash them in for gold. Toye says only a few investors have done that to “kick the tires.”
In a way, though, the restriction adds cachet. The gold is locked in Canada’s equivalent of Fort Knox: the Mint’s castle-like 1908 headquarters on Sussex Drive in Ottawa.
Champion Iron Ltd.
Revenue: $655.1 million
Profit: $147.6 million
Three-year price gain: 435%
P/E ratio (trailing): 18.1
Talk about a buying opportunity. In December 2015, Montreal-based Champion Iron, chaired by savvy industry veteran Michael O’Keefe, agreed to purchase the huge Bloom Lake iron ore mine in northeastern Quebec. The deal pulled the property out of bankruptcy protection for just $10.3 million in cash plus the assumption of $42.8 million in liabilities (mostly environmental).
For that bargain price, Champion got a mine in which two U.S. giants had invested US$3.6 billion since 2009 to prepare for production, as well as a railway line to a new all-seasons export terminal on the Gulf of St. Lawrence.
Even so, Bloom Lake was no sure thing. The global price of ore had slid from a peak of almost US$190 a tonne in 2011 to a low of US$40 a tonne that December.
But the timing was near perfect. “I think we missed [the bottom] by a day and a half,” says CEO David Cataford, who was hired in 2014 as a vice-president and promoted to the top job this past April.
Iron prices have steadily climbed to about US$90 a tonne today, and the company has invested another $200 million. The mine began producing in February 2018 and will soon double its capacity to 15 million tonnes a year. Champion has also almost halved production costs to $49.50 per tonne through several improvements, including activating a 3.5-kilometre conveyor belt to transport ore from the mine for processing, rather than trucking it, and introducing a new system to store tailings. The cost reductions have made the company competitive with BHP Billiton, Rio Tinto and other global iron ore giants.
Even better, ore from northern Quebec now commands a premium of about US$10 a tonne over lower-grade product from Australia and Brazil. That’s thanks to China, which consumes about half of all ore and is eager to make its steel cleaner.
Evertz Technologies Ltd.
Revenue: $443.6 million
Profit: $78.5 million
Three-year price gain: 5%
P/E ratio trailing: 18.3
Six generic-looking buildings in an industrial park in Burlington, Ont., generate the technical dazzle seen in big-time sports telecasts, including the NFL, NHL, Summer Olympics and many more.
Evertz makes equipment and software to edit and transmit images and sound. The company traditionally served broadcasters, but now works with just about any organization that uses audiovisual tools. Chief financial officer Doug Moore tries to describe things simply: If you’re watching a hockey game, there are cameras and microphones at the rink, and live action and replays appear on your screen. “All the stuff in between? That’s kind of what we do,” he says.
The company was founded as Dynaquip Electron Devices Ltd. in 1966 by husband and wife Dieter and Rose Evertz, and it made time-coding and closed-captioning equipment.
In 1997, annual sales were still only about US$2 million. But that year, Romolo Magarelli and Doug DeBruin, young executives with a rival video technology company, bought Evertz.
Their timing was auspicious. The industry was on the cusp of two massive shifts: from standard to high definition, and from traditional broadcasting to Internet delivery. Evertz’s sales soared to US$141 million in 2006, and it went public. Revenue has more than tripled since, and the company has more than 1,600 employees, about 1,300 of them in Burlington. “That’s quite a growth rate,” says Moore.
Yes and no. Other tech plays have grown much faster. And Evertz’s systems are specialized. But analysts are bullish. Here’s a hint from a recent Canaccord Genuity report: Evertz’s revenue tends to peak in Summer Olympic and U.S. presidential election years. “This could be a near-term tailwind for the stock,” the report says.
Barrett Emke/The Globe and Mail
Algonquin Power and Utilities Corp.
Revenue: US$1.6 billion
Profit: US$79.1 million
Three-year price gain: 65%
P/E ratio (trailing): 18
Why would anyone shut down a “perfectly good coal plant” and replace it with US$1 billion worth of wind farms? Algonquin co-founder and 30-year CEO Ian Robertson asks that question rhetorically. He then quickly substitutes “operational” for “good,” because he doesn’t want to offend the environmental sensibilities of his 12-year-old daughter, Lauren.
This March, Algonquin will shut down a 1971 coal-fired electricity plant in Missouri; it plans to have wind farms in that state and Kansas, with a total capacity of 600 megawatts, in commercial operation by late 2020. The reason is simple: Wind is now cheaper than coal.
The wind farms will produce electricity for about 4 US cents per kilowatt hour to start. Under a production tax credit, new U.S. wind farms get a subsidy of 2.2 US cents a kilowatt hour for their first decade, bringing the price below that for coal power, which is about 3 US cents (the Trump administration has discontinued the credit). And the cost of wind, solar and other renewables is still declining. “Renewable energy has come of age economically,” Robertson, 60, says.
Over the next five years, Algonquin, based in Oakville, Ont., plans to boost the proportion of its power generated from renewable sources to about 75% from just under 40% now.
The company is a hodgepodge of assets. It started in Ontario’s then newly deregulated electricity market by opening a small generating station on a river near Peterborough in 1991.
Algonquin currently owns more than 70 power generation facilities and gas and water utilities in Ontario, New Brunswick and 13 U.S. states. It is still a fraction of the size of industry giants, such as Ontario Power Generation and Hydro-Québec, but it is also more nimble. “There is no way to get electricity any cheaper than through renewables,” Robertson says. “What a great turn of events for our customers and our kids.”
Clarke Inc.
Revenue: $6.9 million
loss: $600,000
Three-year share price gain: 33%
P/E ratio trailing: 7.1
Whether you call George Armoyan a catalyst investor or a raider—or both—he was on quite a roll in the early 2000s. He accumulated significant interests in almost a dozen mostly beat-up mid-sized companies and then either turned them around or sold out for a quick profit. Shares in Clarke, Armoyan’s principal public company, soared from about $2 to almost $11 in 2007.
Alas, the shares tumbled back down to $2 during the financial crisis. Michael Rapps, who joined as vice-president of investments in 2011 and succeeded Armoyan as CEO in 2014, says Clarke got distracted. It needed to return to its core strategy: “to be an opportunistic investor with a concentrated portfolio focusing on distressed, out-of-favour or turnaround-type investments.”
Clarke has pared down to just five significant holdings today: minority stakes in two energy-related companies, full control of Holloway Lodging Corp. and a ferry service across the St. Lawrence, and some real estate.
Investors have applauded. Clarke shares have climbed back above $12.But there are caveats to consider. Much of the price gain has been fuelled by buybacks, which have reduced Clarke’s shares outstanding to about 12 million from 20 million.
Rapps also warns it can take years for any one of the company’s investments to pan out. In the meantime, its short-term earnings can fluctuate wildly. Clarke totals the market value of its investments at the end of each quarter, and records any moves up or down—temporary or not.
Rather than earnings, Rapps prefers to focus on Clarke’s tangible book value per share, which has been about $14 recently. The lower market price frustrates him. “We consider our stock cheap,” he says.
And Armoyan remains as 44% owner of Clarke and its executive chairman. As in the early 2000s, you still gotta believe in his vision.
Canlan Ice Sports Corp.
Revenue: $87.6 million
Profit: $4.5 million
Three-year price gain: 57%
P/E ratio (trailing): 18.5
If you’ve ever tried to book a rink during hockey season, you know the demand is intense. But turning Canada’s national passion into a profitable business has always been a challenge.
In the mid-1990s, what was then Canlan Investment Corp. boasted it was going to consolidate North America’s arena business. The company’s shares soared, further boosted by its extensive Vancouver real estate holdings. But the share price crashed by more than 90%. The Barker family took managerial control, raised its stake in the company (it now owns 75%), refocused Canlan on ice sports, cleared away debt and began a very long rebuilding process.
Current CEO Joey St-Aubin, a star Ontario Junior centre in the late ’80s and early ’90s, joined Canlan in 1997 and was promoted to the top job in 2009. Progress since then has been slow. Revenue has grown a bit, and Canlan operates 60 rinks and 20 other surfaces at 21 facilities—about the same total as a decade ago.
But Canlan’s share price has more than tripled, and St-Aubin says behind-the-scenes improvements continue. One is expanding the Adult Safe Hockey League, the largest recreational organization in North America, with 65,000 players. “We play more games in one week than the NHL does in a season,” he says.
Further growth will be tough in Canada, however. Building or buying more arenas in the red-hot Toronto and Vancouver real estate markets is very expensive. And Canlan competes with government-owned—and subsidized—facilities when selling ice time.
But there are promising opportunities in the United States and in other sports, including soccer, volleyball and basketball.
Expanding Canlan’s shareholder base isn’t an urgent priority—in addition to the Barkers, another family controls 17%—but the public float is now so thin, even buying or selling a few hundred shares can whipsaw the stock price. “Obviously, we’d like to be a little more liquid than we are today,” St-Aubin says.
As seen in the Feb. 2020 issue of Report on Business magazine