http://www.donvillekent.com/pdf/DKAM-Newsletter_January_2014_Final.pdf
Great franchise stocks to own for 2014
The preceding discussion has meant to serve as a lead in to our discussion
regarding the best franchise stocks to own in 2014. Before we launch into
Company specific analysis, it has sometimes been asked why I choose certain
companies from our list and not others, particularly if they appear to meet our
ROE and P/E requirements. The answer typically is either a poor track record
or cyclicality. Some companies tend to have a pattern of earnings which I call
“good year, bad year”. Such companies appear in our screens but their lack of
consistent track record over the years prevents us from owning the stock or
recommending it to others. The second type of company is the cyclical
company, which will often appear attractive at the peak of the company’s
economic cycle, when in fact we know the stock is actually expensive. Each of
the stocks that I discuss subsequently are ones that I think are reasonably
priced, have good track records and can perform well in all economic
environments.
Constellation Software – Is a Toronto based software company and is
arguably run by the most astute management team in Canada. The company is
a leading provider of software and services to public and private sector markets
and close to 90% of its revenue is now derived from outside of Canada. The
Company is led by Mark Leonard who h
since start-up. We expect the Company to grow by close to 35% in 2014.
Constellation Software remains our largest position with a 13.6% weighting in
the Capital Ideas Fund.
MacDonald Dettwiler – Is a Vancouver based technology company with
operations that include satellite communications, space exploration,
surveillance, and robotics. The Company is one of the few truly high
technology companies listed on the TSX and while its annual profits tend to be
a bit lumpy, its ROE consistently exceeds the 20% level. We expect the
Company to grow by 37% in 2014 and it represents a 3.3% weighting in the
Capital Ideas Fund.
CGI Group – CGI Group is a Montreal based multinational information
technology consulting, systems integration, outsourcing and solutions
company. The Company has achieved an ROE in excess of 20% in nine of the
last ten years and is currently one of the most reasonably priced High-ROE
stocks in Canada. While CGI has its detractors, we believe the company will
continue to deliver strong returns to investors via its ongoing operations,
acquisitions, and share buybacks. CGI represents 9.2% of the Capital Ideas
Fund.
Figure 7 – Constellation Software Inc.
FYE Dec
Home Capital – Toronto based Home Capital is the holding Company for
Home Trust which is a federally regulated trust company offering deposit,
mortgage lending, retail credit and credit card issuing services. Over the past
twenty years, Home Trust has never achieved an ROE of less than 20%. Home
Capital represents 7.6% of the Capital Ideas Fund.
Valeant Pharmaceuticals – Montreal based Valeant Pharmaceuticals is a
multinational specialty pharmaceutical company with a focus on branded
pharmaceuticals, branded generics and over-the-counter products. The
company was created in 2010 via the merger of Valeant and Biovail and is
now one of the fastest growing speciality Pharmaceutical companies in the
world. We expect the Company to grow by at least 35% in 2014. Valeant holds
a 9.6% weighting in the Capital Ideas Fund.