Q2 2021 Portfolio – Update and Reflection

Below is a summary of my thoughts on Q2 performance and holdings, peppered with sector and macro musings. YTD returns are on the Portfolio page.

Waste Connections: Currently my largest holding, for good reason: the waste industry is the place to be right now. I wrote a piece on it a few months ago highlighting why I am bullish on the name and sector. The thesis is simple: with the US re-opening full steam ahead heading into the summer, commercial waste volumes are on the rise and that means increased and more frequent loads. This stands in contrast to muted commercial volumes during the height of the lockdowns. Furthermore, polling data suggests people are itching to take vacations and ~50% say they are going to take a road trip — which means an active populace and garbage to boot. The inflation scare has eased for now, but Waste Connections sits comfortably should that scenario rear its head with pricing power to mitigate costs.

Alimentation Couche-Tard: I try not to get emotional about my stock picks, but here’s a story I can’t help but love. Couche Tard started as a single convenience store in the 80s and is now a global retail empire. The beauty of this name is it acts both defensively (consumer discretionary) while still offering reasonable growth (30% gross margins and ~15% ROIC as a company objective). The pandemic boosted same-store sales as local shoppers bought more goods (“larger baskets”) which was a boost to early pandemic results, but this was offset by lower fuel revenues due to lockdowns (and fuel makes up ~50% of Couche Tard’s revenue). The biggest story was the failed Carrefour deal, which I thought was a bold and sensible move, although the street seemed to disagree. Alas, there continues to be an M&A overhang on the stock as some worry that by branching away from the c-store space, either Couche Tard will not be able to realize synergies, or, more broadly, the move away from c-store implies “writing on the wall” for fuel revenues. Alain Bouchard, who founded and still chairs the company, envisions Couche Tard as a global retail giant. If that means incorporating other areas of retail alongside the c-store and fuel space, so be it – and management is clear they will seek such opportunities when the value presents itself. Their stake in Fire & Flower retail cannabis is but one example of the many roots this company can grow and expand given its healthy cashflows and strong balance sheet.

Enbridge: The energy sector saw its greatest rebound ever over the last few quarters, while Enbridge and other pipelines lagged the party. For starters, Enbridge did not take as great a hit as producers and therefore had less ground to gain. The real story of course is that pipelines = bad, and the Line 3 + Line 5 drama adds fuel to the narrative. Still, Enbridge put up a solid Q1: volumes are up, L3 construction on target, and they recently sold off some non-core assets to re-pay debt and de-leverage. The Colonial pipeline shut down further illustrated the necessity of oil and pipelines for daily life, even if renewable energy is the way of the future. I also wrote a piece on Enbridge as a leading renewable player by current net MW capacity, and they are making further strides in carbon capture and other renewable energy solutions. Alas, the “scarcity” argument is rearing its head as no further pipelines are going to be built, this should (in theory) increase the value of pipeline assets. There is no doubt that in the short-term, pipelines continued to be undervalued and provide a healthy and stable yield. While Enbridge is one of my current largest holdings, the plan is to reduce this significantly after L3 completion and a return to more fair values (say mid $50s) and put the funds towards more growth oriented names.

Constellation Software and CGI Inc: I group these two together, not merely because I wrote a piece on them too, but because they share similar growth profiles. Constellation is by consensus one of the best managed companies on the TSX, with an obsessive focus on growing the company year in and year out. And they have done so successfully, producing record numbers consistently and making smart M&A to continue growing. Mark Leonard’s recent letter even mentioned cutting the dividend so that the money could instead be re-invested for growth (see: we can allocate capital better than you). Not something you hear often, and I’m not arguing – take my money. Constellation will remain a top 3 holding, likely forever.

CGI Group is a software consulting company, again something I wrote a bit more in depth on and why I like the name: organic growth was on the uptrend pre-COVID, and took a hit until Q1 where it started trending positive again. From a purely macro perspective, COVID forced every company on the planet to adapt technologically or die, and CGI’s specialty is in helping governments and corporations see this process through. The demand for their services is there, with record bookings and backlog heading into Q2.

Thermo Fisher Scientific: A new addition this quarter and the only non-Canadian name in the portfolio. I wanted to add health care exposure, and to be frank the options on the TSX pale in comparison. Thermo Fisher produces some of the most common and widely used scientific instruments and machinery in the industry, and recently acquired PPD, a global drug research and development laboratory. COVID raised this name to new heights, but a look at the chart pre-COVID tells you all you need to know about how stellar a business this is. My macro take is that even with tough post-COVID comps, there will continue to be renewed demand for TMO’s products and knowledge base, especially in academia (one variable of their revenue segment that is beginning to normalize). Buying opportunities don’t come often here, and I was going to add more around $440 – the key with this name is to buy on technicals, at or (especially) below the 200 Day Moving Average.

Fortis and Canadian National Railway: I’m lumping these two names together for the simple reason that these are literally “set it and forget it” stories. I added Canadian National in Q2 and was a little early to the party around $136, considered adding more around $125 but with the whole KSU mess I decided to hold off. Should CNR drop another 10% from here, I will be looking to add.

Power Corporation: Here’s a name I was looking to offload this year, only to be thrown bullish after bullish news regarding the complete resurgence of their wealth management businesses (like IGM), which were struggling pre-COVID. As pleasant a surprise that was, my biggest reason for holding onto and being bullish on the name continues to be their ownership of Wealthsimple. Sometimes the thesis is very simple (no pun intended), and here’s a perfect example: Wealthsimple has grown significantly over the past year, reaching a younger, tech-savvy target market that wants to be in control of their own finances. WS provides this through simple and no-commission trading (that’s the hook). We’re in the early innings of a company that has the potential to disrupt traditional banking through innovation, the key driver of which seems to be in capturing a younger demographic early and growing along side them — that’s the sinker. While Power Corp has been asleep for the past decade, their recent moves have started paying big dividends. I’m holding for now and curious to see how the Wealthsimple story evolves.

Brookfield: I currently own Brookfield Property Parner shares, but these will be converted to the parent Brookfield Asset Management, and I’ll be holding on to these tightly. There’s no denying Brookfield is an incredible asset manager, but the one gripe I have is that owning the underlying names (eg. BPY, BEP, BIP etc) has proven to be a poorer choice than owning the parent (see: BPY performance, recent BEP asset sales and debt load). While any risks with subsidiaries ultimately flow up to the parent BAM, the safe choice to make is to own the name that ultimately controls the assets while providing the diversification necessary should risk arise in a particular sector (eg. real estate). I won’t be adding any more BAM at current levels, but this is a “forever” hold and would add more should the price fall back to earth — I’m keeping an eye on how/if BPY will impact BAM results in the next year or so.

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