Michael Hainsworth and Robert Tétrault
Michael: What I want to come back to Bay Street for Valeant investors, is the shares at the end of the day down more than 11% after the company announced Michael Pearson’s on medical leave? For perspective on how we handle this and the volatility we’re off to Winnipeg to speak with National Bank Financials Rob Tétrault. Good to have you with us.
Rob: Great to be here Michael.
Michael: Are you as concerned as the others we’ve spoken to that it’s very difficult to run a company that’s under this much scrutiny by committee?
Rob: Absolutely. I’ve stayed away from Valeant for a while and this is more a pain I think for shareholders. Running a company by committee can be very difficult. Not only that, what’s the succession plan for this company? Lot of volatility lately, lots of ups, lots of downs and this whole Walgreens deal, honestly the market doesn’t like the fact that Mr Pearson’s out.
Michael: Well, pneumonia can creep up on anybody at any point. Is it really fair to slam the company? I’m not saying you are, but is it fair to be upset that the company didn’t have a succession plan in place for a man who for all intents and purposes was a picture of health otherwise?
Rob: Yeah, I mean if you look at what Mr Pearson’s done with this company since 2008, he’s literally taken it from a small player to you know, the largest company in the TSX this year. So, you know he’s not getting any credit, nor respect for sure. Pneumonia’s obviously something that could hit anyone but I think the issue really is what has been happening in the last couple of months here and how have they reacted. With nothing prepared for that, it’s obviously been difficult for the market to digest this more negative news again.
Michael: So, if your phone rings and it’s a client who says I own Valeant Pharmaceuticals. I‘ve seen the stocks tumble as much as it has since the price gouging allegations on Capitol Hill and then the short selling kicked in, what do you say to someone who own shares today?
Rob: Honestly, I’d say it depends on two things. One, how do you feel about it at night? Is it keeping you up? Is it something that’s affecting your health and if it’s yes, then get out. If you have a well-built portfolio, if you have a diversified portfolio, you will be fine. One holding will not ruin your portfolio. Get out, Tata has moved on. It’s a stock like any other. There are plenty of good companies out there. If you’re not terribly concerned about the day to day volatility I would suggest to you, you cut ties in the next week or two, or three or month when there’s a bit of a rally. Next time there’s a maybe enough week or enough couple of days with the stock you could cut ties then. I’m personally not long Valeant and none of my clients are.
Michael: Or is the idea here Rob that if you saw a tax loss selling in the month of December in January, anybody who still believes in the company would buy it back?
Rob: That’s the idea, right. So, anybody who sold that company, now obviously we know today was the first day for the 2016 trading year and last week was the last day for tax loss selling, so those sellers are now out. So, the idea is that in theory you should see some sort of a bump here in the next few days. So, today’s reaction is the pneumonia incident and perhaps later this week and next week we’ll see a little bit of a bounce here. That being said, I would still get help.
Michael: What do you make of the move today on Bay Street generally? I see that Staple stocks were in favour in this session. Why?
Rob: Bay Street today are lower volume. I don’t make too much of it. We’re talking 70 points. We’re talking half a percent on very low volume. You mentioned 40% less volume than normal. I don’t make tons of it. I think south of the border was more important and more newsworthy for sure today.
Michael: In what way?
Rob: Well, we had a 200 point update today, so we’re talking about those consumer discretions, consumer Staples, on the heels of big retail numbers, the Shiller price home index numbers came in good, there’s been some good macro data here already what’s been a very short week for us. But there’s been some good macro data and hey, 200 points is a great start to the first none tax stock seller of the year here. People are getting back in obviously.
Michael: Yeah, but you wouldn’t want to be in Staples I can imagine, if you had faith in the health of the US economy. Wouldn’t you prefer to be in discretionary?
Rob: Discretionary, absolutely. If you believe that we’re kind of in the upswing of a cycle here, you want to be in those discretionaries. You want to be in any company that’s not a staple. You want to be in Amazon, you want to be in Nike, you want to be in those companies. They’ve outperformed this year the Staples by around 20% or so. So, if you believe that this cycle in the States is nowhere near done yet, you want to be in the discretionaries.
Michael: Now, I know there are three Canadian companies that you do like. You’ve got Artis Reit, Boyd Group, and New Flyer on your radar screens. Of those three, which one is your favourite?
Rob: Well, Michael let me just point out first of all that I’m a Manitoban, I’m a homer at heart that’s why I cheer for the Jets. Well big team Canada win today in overtime, but I’m talking about Manitoban companies. Those there are Manitoban companies. My favorite for sure at this point would be Boyd. I like what they’re doing. They’re affectively churning out mom and pop stores. They’re buying them at a crazy discount. They’re applying their model to it. They’re not raising equity to create a huge growth. We’re talking same store growth and we’re talking acquisition growth. They’re growing two-fold. They’re going almost double digits on both sides. And because of that, the stock has just boomed and is roaring and I love it for that. It bounced bit a back of its highs. We’re down to the 64 range. I like it at this point. I think this is going to be an $80 stock in 2016.
Michael: All right Manitoban man, why go for a Boyd if you think the people are going to be buying cars? Why not go to an auto depot type scenario instead?
Rob: And the reason I like it is I like their model. 1) They have forgivable loans with a lot of their suppliers, so we’re talking paint supplies and glassware suppliers, forgivable loans, and 2) again is the growth. They’ve got tons of cash, they’ve got $350 million of capital sitting there, either in a credit facility or either in cash. They have almost no debt, so if they decide to get a better leverage going here, and management might do such a thing, and they start acquiring one-offs shops and even franchises if you will, they just acquired two of them earlier this year, we could see some big growth numbers and I think the plan is to keep growing roughly 7 to 10% on the same store growth, and now there’s 7 to 10% on the new acquisition growth, that makes for some very nice growth and it’s trading at a multiple that you wouldn’t think. It’s a bit of a discounted multiple in my mind.
Michael: And when it comes to dividend it’s not even a full percentage point at this point. Do you think 2016 is the year that they start giving us back a little more?
Rob: Well, they just announced a couple of small dividend raises. These guys were in the penalty box. I don’t know if you recall this, but several years ago they were in the penalty box, the stock got hammered, they barely survived, and now they’re holding on to their cash like a mature company would. Now, the point here should be that they should be able to grow, they should be able to grow and they’re keeping that cash. I don’t want the dividend. Honestly, don’t give it to me, invest it, invest it, invest it, take care of it make me more money than I can make with my 1%. So, I’m happy that they’re keeping the dividend, keep it. Take care of it.
Michael: So, we’re looking at the stock at 64.80. What, Rob, did you say your twelve month target price was?
Rob: I think this could be an $80 stock in 2016.
Michael: So, about a 22% upside from here?
Michael: Rob, fascinating stuff. Thank you so much for your time.
Rob: Go Jets go!
Michael: Rob Tetrault, Portfolio Manager at National Bank Financial joining us from Manitoba.