Alright, so 2020 hasn’t exactly been a great year for investors so far. That being said we’d like to give you 3 businesses that we feel will outperform the TSX index over the long term.
Roll up your sleeves and get ready for three high-conviction buys trading at extremely attractive valuations:
Fairfax Financial Holdings
Fairfax Financial Holdings is run by Prem Watsa and he is often referred to as the “Warren Buffett of Canada,” namely due to the fact that Fairfax has a similar method of operating to Berkshire Hathaway. Fairfax is a property and casualty insurance and re-insurance business, and it uses the money it generates from the insurance business to engage in investment management services.
The business is strong, cash generative and has a history of fantastic investment returns. Since 1985 it has grown book value per share from $1.52 to $486 in 2019. That’s a compound growth rate (CAGR) of 18.5%. There have been big hits along the way, including in 2001, 2005, 2013, 2016 and what’s shaping up to be a tough year in 2020. The point is that Fairfax has a strong history of growing shareholder value by increasing the tangible book value of the business and doing so without printing off tonnes of new shares.
The drawbacks? Well, Fairfax has had a terrible quarter on the surface. They posted losses of $1.3 billion for Q1, which works out to -$47.38 per share compared to $26.98 per share last year. The book value of the business dropped to $422 (representing a 13.2% drop) and it took large impairment charges against investments in Resolute Forest Products and Quess.
Here’s a summary of why we’re strong advocates of buying:
- Fairfax Financial Holdings has a strong cash position and $16.2 billion to spend on investments
- The company has 52% of its equity invested in Atlas Inc (ATCO), a world class utility holding company with a solid dividend yield and good balance sheet
- The net premiums written by insurance and re-insurance operations actually increased 10.1%
- Fairfax tends to have a bad year every 4-5 years and then bounce back sharply. We expect 100% upside from the $359 price today, provided the economy rebounds accordingly in 2021/2022
- Fairfax now pays a 3.5% dividend yield and has a fortress balance sheet with 15% payout ratio
Morningstar Quant gives this business a 5* rating and it trades at a 35% discount to fair value:
Strong Buy at $359.
When I was working abroad I was consulting in a large factory, and a few members of staff from the stop floor ushered me to join them. We had a quick chat and I soon realised what they wanted to discuss: “if you’re going to Canada, you know, could you pick us up some Canada Goose jackets?” They asked. They were serious, too. And you should be when it comes to picking up shares in a highly profitable and cash generative business that is trading at a discount.
Canada Goose Holdings is a premier apparel company that was founded in 1957 in Toronto. The business designs, manufactures and sells high end clothing including parkas, jackets, shells, vests and accessories. They have 11 retail stores and sell through e-commerce channels to 12 countries.
Earnings and revenue have been on a tear, growing over 50% per year over the past 3 years. Revenue of $403mn and $21.6mn net income in 2017 grew substantially by 2019 to reach $831mn and $143.6mn respectively.
Morningstar Quant gives the business a 3* rating and it trades at a 19.2% discount to fair value:
Restaurant Brands International
No Canadian needs an introduction to Tim Horton’s and the ubiquity of the brand across the country. That being said, did you know that it was owned by the same chain as Burger King – otherwise known as Restaurant Brands International?
The company operates over 23,000 restaurants in more than 100 countries and it operates in three segments: Burger King, Tim Hortons, and Popeyes Louisiana Kitchen.
Revenue has grown from $4.1bn in 2016 to $5.6bn in 2019. With Covid-19 closing down vast swathes of the restaurant business globally, expect a huge number of small and medium sized restaurateurs to go under and go out of business. In turn big chains like Restaurant Brands will have the cash and resources to scoop up their leases and open new fast food chains around the globe. That, over time, will catapult earnings higher.
Adjusted earnings per share are set to fall to $2.06 per share before rising to $2.85 per share in 2021. Provided that fast food chain volume can recover substantially by 2021 that makes RBI a solid buy.
Morningstar Quant gives RBI a 3* rating and it trades at a discount to fair value of 26.3%:
Canada’s main stock index, the TSX, is dominated by energy and oil companies. These three holdings would complement a balanced portfolio and also help to increase exposure outside of these sectors.
Disclosure: I/we own shares in Fairfax Financial Holdings (FFH.TO), Canada Goose (GOOS.TO), and Restaurant Brands International (QSR.TO)