James Telfser's Top Picks: November 12, 2021
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Top picks from James Telfser, partner and portfolio manager at Aventine Investment Counsel
MARKET OUTLOOK: While we acknowledge the current risks in the market, we believe the positives outweigh the negatives. We continue to see improvements globally in COVID-related vaccination rates, infections, hospitalizations, and deaths.
Real interest rates are still incredibly low and negative news regarding the supply chain appears to be peaking. We believe these factors will continue to support growth, which has been accelerating since the summer. In this environment, equity allocations will outperform, especially given the strength of the recent earnings season (Q3-21) in both the U.S. and Canada where we have seen record-breaking revenue, earnings surprises, and record-high profit margins.
We are finding opportunities in stocks that have lagged the market recently as commodities captured the incremental capital flow. We have seen several periods like this throughout our careers and have found that the dispersion between fundamentals and valuations in Canada can get particularly large during these periods. At Aventine, we gravitate towards higher quality companies with a much longer time horizon and as a result find these periods meaningful to our long-term results. TOP PICKS:
Park Lawn Corporation (PLC TSX) At Aventine, we tend to gravitate towards companies that can compound capital over long periods of time with organic and inorganic growth opportunities. We have always been drawn to the cemetery business, which tends to be recession-proof, inflation-protected, and highly fragmented.
Currently, there are two major players within the industry – Service Corp (SCI-US) and Park Lawn (PLC-TO) – in addition to several private equity players. As such, the industry is still dominated by mostly independent operators, which comprise 89 per cent of the market.
We expect Park Lawn to continue its long track record of successful M&A by utilizing its pristine balance sheet – currently 1.2x Net Debt/EBTIDA. Park Lawn has completed $700 million in deals (31 acquisitions) since 2014 and has consistently generated strong returns on capital.
