Looking Ahead

And, northward.

Here we stand at the very end of another year. There was a lot of good in it. My family was happy and healthy. I saw my children learn and grow. As for investing? Unless one had the foresight to put a healthy portion of one’s portfolio into energy companies or Turkish stocks, 2022 will not be remembered with much fondness by investors. (I was not one of those enlightened souls.) While it wasn’t the easiest year, I did manage to outperform benchmarks and avoid the kind of losses that erase years of hard-won gains. The mathematics of investing are both rewarding and punishing. A decade of solid 10% gains results in a portfolio not merely doubling, but increasing by a factor of 1.6. But if the portfolio falls 60% the year after, all that progress is lost. This is exactly why investors are cautioned to focus on downside risks. To me, this means sticking to companies with strong balance sheets, healthy and recurring cash flows, intelligent and well-incentivized management, and good competitive positions. The market spent much of 2020 and 2021 rewarding the total opposite. The chickens came home to roost in 2022.

As a belated holiday gift to you, dear reader, let me offer a few thoughts on opportunities in a market where I have been spending a lot of research time of late: the Dominion of Canada. Apologies in advance: this gift cannot be returned or exchanged.

Looking North

I like Canada. I think a lot of Americans under-appreciate the economic and cultural dividends that the close relationship between the two countries creates. Sure, sometimes we spat over tariffs, but it really says something that the two countries trust each other enough that the world’s longest national border is also completely undefended. I’ve spent a few days in Toronto and Montreal, and a few weeks camping in Algonquin Provincial Park. Eventually I hope to visit the Maritime provinces, British Columbia, and the Canadian Rockies. I sometimes wonder just how far north I could drive in a normal passenger vehicle. Lake Athabasca seems doable, seasonally. What about Great Bear Lake?

Naturally, I also enjoy checking out Canadian companies. The Canadian market is dominated by a small roster of blue chips in the banking, telecom, tech, and consumer sectors. These get the lion’s share of investor attention. But below this there are numerous mid-cap and small-cap businesses, some of them very successful. Then of course there are the thousands of speculative micro-caps, laregly in the resource exploration industry. These are mostly listed on the TSX Venture segment or one of the other junior exchanges like the Canadian Securities Exchange and NEO. I’m a little young to remember the glory days of the Vancouver Exchange with its host of shady characters and con artists, but trust me, not much has changed. While there is value on the Canadian junior exchanges, be prepared to wade through a lot of dreck to find it.

Rather than poke around in the muck, I think most investors would be better off examining some of the good quality mid-cap and small-cap Canadian companies that fly below the radar. I especially like companies that are mid-sized, operationally speaking, but trade like forgotten micro-caps because of small floats and illiquid shares. Here are three of my favorites.

Algoma Central Corporation

Shipping may be the world’s worst industry. I can hardly think of a shipping company which merits consideration as more than a cyclical trade. These are not buy and hold stocks. Trading sardines, not eating sardines. The only exception is the rare shipping company that occupies some profitable niche. Maybe some kind of specialized and difficult to acquire/operate vessel, or a unique operating geography where other shippers can’t operate. Algoma Central fits the bill. Algoma, traded as “ALC,” is one of the largest owners and operators of dry-bulk and tanker vessels on the Great Lakes and the Saint Lawrence Seaway. These tricky, environmentally sensitive inland operations (cue Gordon Lightfoot) require a high degree of expertise. Founded in 1899 and listed as a public company in 1958, Algoma has decades of experience in these markets.

Now, Algoma is not immune to the realities of the shipping industry. The business is still cyclical and capital intensive. But Algoma has been able to exceed its cost of capital through market cycles and has been a responsible steward of investor capital. Over the last few years, Algoma divested its portfolio of Sault Ste. Marie commercial property. The temptation for most shipping companies is to own ever more ships, economics be damned, just as the temptation for every oil and gas executive is to drill more wells, confound the returns. But Algoma Central has paid multiple large special dividends while still managing to make well-considered additions to its domestic fleet and ocean-going pool.

Algoma shares popped recently on the announcement of another special dividend. But in between positive announcements, shares tend to return to baseline valuation of 7-8x normalized shipping profits. I think that’s a good entry point, one that is likely to provide low-teens annualized returns over several years. Algoma Central is not the kind of company that will supercharge anyone’s portfolio, but you can do a lot worse than buying a well-financed, competitively advantage company at a single-digit multiple of earnings.

Senvest Capital

Now for a real weirdo. Senvest Capital Management, LLC is one of the world’s most successful, lowest-profile hedge fund managers, and investors can effectively buy into its managed funds at a huge discount via the parent company, Senvest Capital. The parent company trades under ticker “SEC.” Established in 1972 as a distributor of anti-theft devices for retailers, the company pivoted over time into a holding company and eventually, an investment advisor. Today, Senvest has nearly $3 billion in assets under management across three funds. Their flagship, Senvest Master Fund LP, has returned 6,242% since inception. The last decade’s returns have been more subdued, but still, let he who has multiplied his investors’ capital >63 times over cast the first stone. Senvest’s technology-focused fund has returned 2,260%. The only blemish on Senvest’s record is its small Cyprus Recovery Fund, down 77% since inception. Senvest is not in the business of minimizing volatility. The managers freely express their interest in maximizing long-term returns, gladly accepting whatever short-term volatility this may entail.

Senvest’s most recent claim to fame is their Gamestop coup. Counter to Melvin and other funds that famously lost billions shorting Gamestop, Senvest took the long side of the trade and when all was said and done, walked away with $700 million.

Senvest’s principals do not seek out media attention and so good info can be hard to find. Still, here are a few media pieces from recent years.

Oddballstocks 2013 Write-Up

The Hedge Fund Journal profile

Institutional Investor interview (paywalled)

Senvest Capital shares are down this year, likely because Senvest Master Fund, LP was down 31% year-to-date as of September 30. Still, at $315, Senvest shares trade at a 46% discount to last reported book value. Book value is likely up substantially since September, as Senvest Master Fund rose 25% in October and November and Senvest Technology rose 11%. Senvest’s current discount to NAV is in all likelihood well in excess of 50%.

Anyone interested in owning Senvest should be aware that the performance of Senvest’s hedge funds will continue to be volatile, and there’s no guarantee of future outperformance. Furthermore, while I am in no way a tax advisor, the company appears to be a PFIC, which could complicate an American investor’s tax returns. (Personally, I think investors are a little too scared of PFICs, but nobody likes extra forms or current tax liabilities.)

Logistec Inc.

Finally, a few words on an “old friend.” I have watched and owned Logistec (tickers LGT-A and LGT-B) for several years, always waiting for a day in the sun that never quite seems to arrive. Logistec owns a large network of terminals and port assets along the Great Lakes, Saint Lawrence Seaway, and Canadian and American Eastern and Gulf coasts. These are phenomenal assets. Totally irreplaceable. The ports and terminals segment prints money year after year. More when commodities are hot and harvests are large, but every year without fail. From time to time, Logistec acquires additional port assets or adds capacity at existing terminals.

Logistec also owns an environmental services business that performs site remediation and water main upgrades/restoration. This segment is, frankly, not as good as the ports division and I wish they would sell it or spin it off. But it does make money and will probably develop just fine as municipal water infrastructure continues to age.

Logistec’s marine ports and terminals division is probably worth 20-23x earnings and its environmental services unit should trade at 12-14x. But Logistec shares languish at just 10x trailing earnings, for all the typical reasons. Logistec has two share classes, neither of which is liquid at all. The company is 2/3 owned by the daughters of the founder. (One of them, Madeleine Paquin, has served very capably as president and CEO since 1996.) And finally, the combination of marine ports and terminals and environmental services is just odd and attractive to absolutely zero investors.

The company is aware of the persistent gulf between the price of its shares and their intrinsic value, and recently put out an investor presentation for the first time. Did it help? Sigh…no.

Despite its moribund share price, Logistec has made a lot of money for its investors over the years, and I expect it will eventually resume doing so. Logistec has the amazing distinction of having recorded positive net income for 53 consecutive years running, and it has a decent shot of repeating the feat.

Thanks for reading! These are hardly the only little-known opportunities in Canada. I welcome your input on what other high-quality Canadian enterprises I should examine. I happen to be accumulating shares of another, which I look forward to describing in due time.

Blessings to you and yours as we move into 2023. I look forward to many more productive conversations in the New Year.