This week’s newsletter will be short, as the bulk of it will be inside our report on our new Bull List addition, WSP Global (TSE:WSP).
However, we have a Bull List removal this week and my portfolio moves. So, let’s get to that first.
My moves this week
I added to my Telus position this week, with the reasonings laid out in our recent Value Call newsletter, which you can read here.
I view the company as attractive from a valuation standpoint, and although I do not focus a ton on yield, I cannot help being drawn in by a near 7% yield on purchases today, either. As mentioned, I won’t spend much time speaking on it, as a ton of the thesis is available in our value call.
I also added to my Alphabet (GOOG) position. The company is going through a significant drawdown right now, and at just 18x earnings, I feel it is one of the more attractive Magnificent 7 stocks.
Finally, I added to my Home Depot (HD) position. This was simply a reinvestment of dividends received.
We’ve removed OpenText (TSE:OTEX) from the Bull List
OpenText was a long-standing company on the Bull List that has struggled to put up meaningful returns, primarily due to a rapid expansion in interest expenses due to the large scale acquisition of Microfocus.
The company had been an outstanding performer over the previous ten years leading up to 2022, and its struggles post-acquisition have been extensive.
Free cash flow generation has struggled since the acquisition, and I would view the company as a firm hold at this point to see whether or not a declining rate environment will help improve the bottom line.
One of the other primary reasons for the company’s removal is out of the mature technology options in Canada, I do view Constellation Software as the better operator. In this instance, it didn’t make much sense to have both featured here at Premium because if I were to buy one right now, I would view Constellation as the stronger option.
As always, any questions related to OpenText or any other companies/strategies can be asked on our Q&A, which you can find here.
We added WSP Global (TSE:WSP) to the Bull List
For those who have been members at Premium for a while, they will probably remember WSP being highlighted previously. It now makes a return to the Bull List.
I do plan to fit this company into my portfolio at some point in the future. However, with the runup in small cap stocks, I’m not looking to sell anything off at this point in time. But, eventually I will make some moves and add a core position in this company to my portfolio.
The primary thesis around WSP Global being added to the Bull List is the fact that infrastructure expansion is accelerating at a rapid pace, and we wanted to add an industry leader that is fully expected to take advantage of that spending.
WSP has a strong mix of both public and private sector spending, which means it should benefit from not only the expansion of government-related spending but also corporate-level spending in light of falling interest rates. The company’s backlog sits at record levels.
It continues to grow on a quarter over quarter basis, and its margins continue to expand. Both of these, in addition to the infrastructure spending, should be added tailwinds to stronger results. The company’s balance sheet is strong, with interest coverage ratios exceeding 4X, and manageable debt levels.
The company’s current leverage ratio sits at 1.7X, and although this is higher than the 1.5X it sat at last year, it is still a prudent ratio debt-wise and also well within the company’s guidance. With the AI revolution fully under way, data center and IT infrastructure spending will, in my opinion, go through the roof.
WSP should be able to benefit from this and also should be able to benefit from a large amount of corporations and governments that need to make adjustments to hit net zero carbon emissions. From a valuation perspective, the company certainly isn’t cheap.
However, I don’t expect it to trade at cheap valuations, considering the economic tailwinds that are behind it.
I believe the company will be able to continue to provide high single-digit revenue growth and double-digit earnings growth on an annual basis. Although some investors would prefer to see the company grow their dividend, I appreciate the fact the company makes strategic acquisitions into higher growth verticals that should ultimately fuel earnings growth, and thus share price, for shareholders moving forward.
