It’s time for our monthly value calls here at Premium. If you missed last month’s inaugural e-mail, at the request of members, we’ve decided to publish a monthly newsletter highlighting what we feel are the best opportunities here at Premium.
We have 2 existing Bull List stocks we feel provide strong opportunities at this time, and we also have a brand new Dividend Bull List addition!
As always, we approach this bear market with a glass-half-full attitude. It is simply giving us better entry points or allowing us to dollar cost average and lower our average price.
We aim to make Premium more useful in a bear market than in a bull market. Because ultimately, it’s what investors do in these types of market conditions that separate the long-term winners.
We’ve added Jamieson Wellness (TSE:JWEL) to the Dividend Bull List
Jamieson Wellness is a company we’ve had our eye on for quite some time now. The company already has a dominant market share here in Canada, and the main thesis behind Jamieson right now is its international expansion, particularly in a large market like China. China is the second largest VMS market in the world, estimated to be more than $20B.
The company is expected to grow international revenue by 125% in Fiscal 2022. This is partially due to the company seeking out acquisitions to get more penetration in the US market, but a large amount of growth is coming from the company’s dealings with Costco. Jamieson’s products being available in Costco means when the retailer decides to stock Jamieson’s products in their warehouses, it can open up new geographical exposure for the company.
The company is becoming more efficient. Not only does it have double-digit returns on equity and invested capital, but it is trending well above its historical 5-year averages. To go along with this, the company has improved its margins by just over 4% since 2017.
Why the Dividend Bull List? One thing we love about Jamieson is that the company presents a unique blend of growth via share appreciation and the dividend. In the company’s short publicly traded life, it has become a Canadian Dividend Aristocrat and has grown the dividend by 80% over that 5 years.
The company is likely to continue growing at this pace as well, as the dividend makes up only 44% of trailing earnings. If we factor in the company’s earnings-per-share expectations at $1.60 in 2022, this payout ratio shrinks to 42%.
We feel the company is a strong option today for those looking for a defensive dividend growth play. With a beta of 0.39, the company is significantly less volatile than the broader markets.
You can view our full report on Jamieson Wellness here
Value Call #2: Park Lawn Corp (TSE:PLC)
There are two factors currently impacting Park Lawn’s share price: it is a high-growth company, and it is considered a small cap. In an environment of hyperinflation and rising rates, growth stocks tend to take a hit because simply put, it becomes more expensive to grow. Especially an acquisition-heavy company like Park Lawn.
Likewise, when uncertainty reigns supreme and the markets are as volatile as they are today, small caps are likely to underperform in a very big way.
That said, neither of these factors are a testament to the company’s operational performance. Furthermore, we can make the argument that Park Lawn is unlike many of the small caps which are for the most part speculative assets. Park Lawn is not a speculative company.
It is a long-standing business, profitable, and is the lone publicly traded funeral services company in the country. This is a case of throwing the ‘baby out with the bathwater’ so to speak.
That said, the 42% dip in share price year to date is an opportunity. Park Lawn is now trading at a 37% discount to historical averages and despite the difficult environment for acquisitions, National Bank released in a note that M&A is picking up in the industry.
We chose to highlight PLC again this month as the company recently held its investor day. There, management reiterated its goal to achieve US$150M of adjusted EBITDA by the end of 2026 which would be a double of Fiscal 2021 numbers. This will be achieved by 30% organic growth and 70% acquisitions.
To achieve this goal, the company needs to spend between $75M-125M annually. Thus far in 2022, it closed on $53M worth of deals, the most recent deal for three Colorado deals excluded. This is the slowest pace in a few years.
While acquisitions may slow, we believe Park Lawn will remain disciplined in its approach. The company has stated many times that its targeted range for acquisitions is 6-8x EBITDA.
The Colorado deal is expected to add US$1.62M in adjusted EBITDA which would imply a purchase price between US$9.72M and US$12.96M. This would imply a total Fiscal 2022 acquisition of ~US$63M and is only one similar deal away from its annual target.
Outside of a down quarter here and there, Park Lawn has done an excellent job meeting expectations in our time covering the company. At the company’s investor day, there was really nothing that stood out which would lead us to be concerned.
In our opinion, the current bump in the road which is a result of disappointing Q2 results and a difficult market, is an opportunity.
Of note, while Dan has been a long-time shareholder of PLC, Mat took an initial position on Friday.
For more information on Park Lawn’s investor day click here.
Equitable Bank (TSE:EQB)
Typically, an environment of rising rates is a good thing for financials. Why? It typically leads to an increase in profitability spread known as net interest margin (NIM). However, those benefits can be offset when are in a period of hyperinflation and when the pace of rates is quickly sending us toward a recession.
So, we’re in a situation where yes, high rates are good for banks, but a recession is not. Lower loan volume in an economic downturn could offset benefits from spreads. We also have the overall fear of delinquent loans and mortgages due to high rates and a poor economy. There are certainly a multitude of headwinds right now.
That said, any fears associated with a housing collapse and a recession causing debt defaults are now completely overdone for a company like Equitable Bank.
Sure, all financials have struggled but Equitable Bank has been hit particularly hard with losses of 30.24% year to date. While we wouldn’t expect them to hold up as well as the Big Banks (which have lost on average 14%), the drop is overdone.
The company is now trading at only 5.32 earnings and only 0.8x book value. In a recent report on small lenders, National Bank made note of an interesting statistic. Small lenders (which include EQB) are now trading at a 41% discount to their Big-6 banks. It is the largest discount seen in a decade.
As such, there are rumours that the Big-6 banks may be looking at some of these lenders as being ripe for acquisitions. In our opinion, it is unlikely that EQ Bank accepts a takeover, especially as the closing of the Concentra Bank deal is just around the corner.
One key item to look for this coming fall is Fiscal 2023 guidance which should include the Concentra deal. We expect double-digit growth yet again which would place it among the fastest-growing financial companies in the country.
Equitable Bank is also on strong financial footing and it remains on track to meet Fiscal 2022 guidance. We reached out to the company not too long ago, asking how much of their loans are insured.
The reply? 46% of the company’s loans under management are currently insured. If you’re unaware of what this means, a simple example would be a borrower putting less than 20% down on a home. They are forced to pay CMHC insurance, which is a Crown corporation. CMHC then guarantees the loan for the bank.
Back to valuation, in the company’s history, it has only hit these levels of valuation three times – during the COVID-19 crash, in 2017 when Home Capital Group was mired in a mortgage scandal, and in the Financial Crisis of 2008.
All three instances proved to be an excellent time to buy. Why? Operationally, Equitable Group performed exceptionally well during all these events. Had the company struggled operationally, suffered from a high ratio of defaults, etc., then we’d certainly have a different take.
However, EQ Bank has proven time and time again that it has a strong loan book despite being a small lender. Could the company’s valuation remain depressed for longer and dip further? Without question. We are in a difficult environment.
That said, EQ Bank is trading close to all-time low valuations, and it is becoming increasingly difficult to ignore. We also don’t focus on timing the bottom which is a near impossibility, just buy good companies at good prices.
