Peter's Picks: Canadian Value Trio

10/30/2015 10:00 am EST


Peter Mantas

CIO, Logos LP

Peter Mantas—a featured expert at the upcoming Toronto MoneyShow—is a value-oriented money manager with Logos LP. Here, he discusses his long-term strategy along with a trio of favorite Canadian stocks, a bank, a high-technology software firm, and a decidedly low-tech maker of wood products such as railway ties and telephone poles.

Steven Halpern:  Our special guest today is Peter Mantas, money manager with Logos LP. How are you doing today, Peter?

Peter Mantas:  I'm good.  How are you?

Steven Halpern:  Very good. You're well known as our leading value investor with decided focus on the quality of both the businesses that you're looking at as well as its management. Could you expand on how important these assets are?

Peter Mantas: Sure. We look for businesses that generate high returns on investment capital, so in other words, high returns over the net tangible assets. The best kinds of businesses are ones that generate high returns over net tangible assets and growth.

And for companies to really experience this sort of trajectory, they need to have not only solid moats in place, as Warren Buffett would say, but also quality management, so, of course, looking at cigar butts is one way of investing, but we also like to look at the quality of the earnings as well as the balance sheet and the management team in place.  

So for that reason, someone may look at a different company and see it's trading at a higher premium than usual based on P/E, but for us, we feel that it may be undervalued because of the quality that is presented, so we like to combine the two when we're looking for a specific investment.

Steven Halpern:  Now you also combine psychology with your analysis and you note that you often find value by looking at the interconnection of reason and emotion. Could you explain this?

Peter Mantas:  Sure. A lot of the businesses that we do look at, those that generate high returns and if-for whatever reason-we see immense amount of fear based on significant indicators, or statistical models, or if we see a period such as the period we just saw from August to October.

In just that one day in August we saw very large companies like Walt Disney (DIS) or Mastercard (MA) dropping 10% to 20% a day.  

These are situations where we like to take advantage of the sentiments on the market and this gives us the best opportunity for us to take advantage of the fears that we can generate higher returns over a lower period of time.

Steven Halpern:  Now you're going to be a featured speaker at MoneyShow's upcoming Toronto show, and given that, let's look some of your favorite ideas among Canada-based stocks and one you like is Canadian Western Bank (CWB).  What's the situation here?


Peter Mantas: CWB has been beaten down because of the recent oil route and has been especially beaten down from August to October, but one of the great things about CWB is that-despite its ties to the oil sector and the energy market-it has a remarkably low loan loss provision.

And that being said, it's got a very high dividend.  It's payout ratio is only 30% and it's been returning significant returns on investor capital over this period of time with not that much growth loss due to the oil pullback.

So we believe that it's been unfairly beaten down based on current evaluation. It's roughly trading at what its current book value is today.

So this provides a significant opportunity for investors to really get into a quality Canadian bank that has a higher growth potential, potentially even more than some of the major ones such as Royal Bank of Canada (RY) or Bank of Montreal (BMO). It's definitely one of our top picks in the Canadian financial services sector.

Steven Halpern: Now you also like a company called Enghouse Systems (TSX: ESL).  For our listeners who may not have heard of this company, can you explain what they do and why you like the outlook?

Peter Mantas:  They're a software company that provides software to vertical markets, such as to call centers or to transportation and supply management companies.  

A similar company in the United States called Manhattan Associates is in a similar business and their stocks have been trading roughly at the same P/E and the same trajectory as Enghouse Systems.

But the real key for them is their growth margin which is near 70%, coupled with their explosive growth, so that correlates to 28% growth over the year prior. Their operating margins are also very high, so as long as, as we believe the growth story is intact, in addition to that 70% plus growth margin, the company will continue to see double digit returns over the while.

Steven Halpern: Finally, let's turn to Stella-Jones (SJ) and that's a Canadian base maker of wood products including things like railway ties for railroads. What's the story here?

Peter Mantas: Stella-Jones is interesting because their main markets are utility poles and railway ties, as you mentioned, and that may not seem a high growth markets unlike pharmaceuticals and technology, but they've been growing at fairly substantial rates over the last few years.  

Last quarter I think they grew over 20% and what they're trying to do is they have a leading market share in the segments, but they're also trying to grow through acquisitions, especially treated wood market, so they recently acquired Quebec Manufacturer of wood products.  

They have very high returns on investment capital and return on equity, so they have a very strong market share, but the real story here is their organic growth and their growth from acquisitions.  

They have grown book value by over 10x over the last ten years, and with their market leading position and focus on acquisitions activity, see continued growth within the company.

Steven Halpern: Again, our guest is money manager, Peter Mantas of Logos LP. Thank you for your time today.

Peter Mantas:  Thank you so much.

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