The saying “There’s more than one way to skin a cat” probably dates back to medieval times when both domestic and wild cats were skinned for their fur. A literal interpretation would be rather repugnant in modern times, yet the saying persists to represent multiple ways to achieve a goal.
Two issues ago, I bemoaned how the past mainstays of a Canadian portfolio, banks and telecoms, experienced declining profitability and share prices for an extended period. The last issue discussed the dominance of U.S. technology and noted that, being value-oriented, we had just modest exposure to this sector. Yet our portfolios have continued to perform despite these handicaps.
To maintain performance, I pivoted to smaller companies with good valuations and invested in energy when the world had forsaken it. The first couple examples are a combination of those two themes. In 2021 I made a small investment in CES Energy Services (TSX: CEU) at about $1.50 per share. It has quintupled in three years, making it a more substantial investment. I continue to hold as it sports reasonable valuations with a price to earnings (P/E) of 10.6 and price to cash flow (P/CF) of 6.0. It produces chemicals and fluids for all aspects of energy production and transportation.
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Another small energy service company I purchased in 2021 was Computer Modelling (TSX: CMG). It has more than doubled in three years, and I recently sold half. It provides software and consulting for reservoir maximization.
Moving off the energy theme, I have had some success with smaller Canadian tech companies. I have owned Vitalhub (TSX: VHI) for two years, with a nice tripling of my purchase price. It provides tech solutions to the health industry. It is expensive from a valuation standpoint but growing rapidly. I have also had good results with Converge Technology (TSX: CTS), originally purchased for about $2.50 in 2020. I then sold one-third at over $10 in the speculative fervour of 2021 and recently added again at just under $5. While earnings are still elusive, it has superb cash flows.
Additional success has been derived from mid-tier companies. One of my biggest winners has been transportation company TFI International (TSX: TFII), which I have owned since 2017. Originally purchased for $23.80, it is now in the $200 range. Unfortunately, I sold two-thirds of my stake at about $80, and then at $130. Still nice gains, but holding would have been better. Convenience store operator Alimentation Couche-Tard (TSX: ATD) has been a good winner, more than doubling in three years, and engineering firm Stantec (TSX: STN) is up almost four times in six years.
Industrial company and generous dividend payer, Russel Metals (TSX: RUS) has delivered solid gains including dividends of 140 per cent in five years, and while the large midstream energy players get the press, I have done well with smaller Keyera (TSX: KEY). Again, including dividends, it has returned over 100 per cent in four years.
I hope these examples illustrate the value of holding until such a time as the stock no longer represents decent value. Many investors sell if they make 20 or 30 per cent.
None of the examples provided should be considered as advice to buy. They simply represent examples of how I maintained portfolio performance largely missing the top 10 U.S. companies and with poor performance of the traditional stalwarts, Canadian banks and telecoms.
I have picked all these examples from the Canadian side of my portfolios to illustrate that even with a weak investment climate, poor stock market performance and a faltering economy, good companies can be found. None of these companies are reliant on government largesse for their success. They simply go about their business, take care of customers and deliver returns to shareholders.
Speaking of a faltering economy, I believe Canada is on the precipice of recession. July numbers showed a decline of 42,000 employees in private-sector employment, while the public sector gained 41,000. This continues a decade-long trend of relatively stagnant private-sector growth but booming government growth. A decade ago, governments in Canada employed 22.8 per cent of workers, and today they employ 25. In 2014, 3.4 million Canadians worked for the government and there were 2.7 million self-employed entrepreneurs. Today governments employ 4.5 million and there are still 2.7 million self-employed. Over the past year government employment has grown eight times faster than in the private sector. (Source: BetterDwelling.com, Aug. 9, 2024.)
Despite insatiable government hiring, unemployment has grown from 4.9 to 6.4 per cent, and youth unemployment has hit a decade-high level, excluding COVID aberrations.
Recessions usually only officially get called about halfway through, when the data is certain. If overall we are not in recession, families with a declining standard of living and companies with declining employment certainly are, whereas governments are booming. The private sector carries the load, and the growing public sector is being carried by a shrinking private sector.
Yet, despite all the negativity in Canada, I continue to look for ways to “skin the cat.”
