Hi folks, Jody White here, Editor with Report on Business. We'll start the discussion at noon sharp. In the meantime, feel free to send me your questions so we can get started right away.
Who is Fred and why are we asking for his input? Fred Westra is Director of Research of Industrial Alliance Securities (IAS), covering the non-bank financial services sector. He has been ranked by Reuters Starmine as a top 10 stock picker in Canada for two consecutive years (2011, 7th place) and (2012, 5th place).
Hi everybody. Fred’s ready and we’ve got some questions in the queue, so let’s get started.
I’m thinking it would be helpful for Fred to provide an overview of the small-cap financial services space. Fred, the floor is yours.
There are a number of verticals in the FI space including lending (consumer, housing, specialty), asset management, insurance (manufacturing and distribution), and special situations (technology related or service related to FI’s). Most companies fall into the smaller capitalization range.
At Industrial Alliance Securities, we focus primarily on companies below $2.5b market cap. We find that many of these companies are trading a low multiples given their earnings and growth profiles. A major reason for this is that liquidity has left traditional sectors like financial services, industrials, technology and consumer products with investor dollars chasing resource (mining and oil and gas plays) over the last few years. This has driven premiums up in resource and reduced premiums in traditional sectors.
We believe that investor sentiment is shifting back towards traditional sectors now and that increased liquidity will help drive up premiums for stocks in those spaces. For FI’s, there are also a number of very large natural acquirers (either Canadian based or international) that can generate nice take-out premiums on FI stocks on an acquisition for our investors. Patience is the key.
Our first question is from Zach
We like Carfinco. ist actually one of our 2 top picks.
it has a 50%+ ROE, 5%+ dividend, and is growing at over 20% YoY with excellent risk management.
EGI is in a turnaround phase, but we expect it to do very well in 2012 and 2013
Underwriting profitability has been completely turned around since early 2010 and a new growth initiative in Europe will likely surporise a lot of skeptics this year.
Next question is from Smallcapinvestor
Unfortunately, MIT is not a name I am familar. However, if one is looking to have a defensive pick in teh FI space, I strongly suggest Davis and Henderson.
Davis and Henderson (TSX: DH, Last $16.94) Strong Buy, $20.00 Target offers amongst the highest yields on teh TSX and has many countercyclical or recession resistant busines slines. Q1/12 disapointed and teh stock came off, but we think Q2/12 will be very strong.
We also thing that Carfinco offers some excellent defensive characteristics.
The biggest risk to carfinco is rising interest rates and we should not see that anytime soon..
Next question is from Pete
See my comments on Davis and Henderson to start with.
However, Home Capital is a very large "small cap" that has experienced virtually no losses on its lending portfolio through both of teh last recessions in Canada. Why? because of amazxing and disciplined underwriting processes. It is trading at very low multiples currently.
As an example, Home Capital had just 7/100ths of percent of loss on its book in 2011. thats a fraction of What Royal Bank can claim.
Plus, new mortgage guidlines from OSFY and the Finance Minister will only help Home Capital's business further in teh next 3 years.
We expect Home Capital to gain less risky business from the banks, which can now not underwrite it because of new rules..
Next question is from Gnip Gnop
On total return side, we like Counsel Corporation (TSX: CXS, Last $0.86) Top Pick, $1.90 Target, Carfinco (TSX: CFN, Last $7.76) Top Pick, $12.00 target, and Home Capital (TSX: HCG, Last
$44.30) Strong Buy, $66.00 target
Carfinco and Counsel. Carfinco provides alternative lending to buyers of used cars with poor credit, has ROE over 50%, goring at 20% and dividend yield of over 5% and excellent risk management. Counsel has a division called street capital which is growing like wildfire, capturing share in broker channel to become now the 3rd largest underwriter of mortgages in Canada to the mortgage broker channel. They are more than ½ the size of First National (TSX:FN) in terms of volume but less than a 1/10 the market cap. We think CXS could be a 5-10 bagger over 5 years..
Carfinco is teh only one of the 3 with a high yield, but CXS will likely institute a strong dividend within 12 months.
I dont officially cover those names, but I think CWB's growth profile is better than LB's, particularly in the leasing business it acquired. I look for low P/B and low P/E's on banks and want to see very good trends in loan losses, write off trends and growing or stable allowance for credit losses.
Performance of a bank through recessions is importnat on teh loss side, so I alos look at that and like to feel comfortable that management is not changing (or loosening) its underwriting standards..
next question is from Joan
Accord is an asset backed lender backed by solid management. We do not cover it, but we know management and think its is well run and well backed.
next question is from mark P
This is an interesting one. We like the yield and its a bit larger than teh average small cap FI, providing some better liquidity (lower exit risk). They have an interesting Niche in financing business owners in wealth transfer or succession planing, exiting of biusinesses.
It certainly has had some good momentum as well. We do not officially cover the name, but that said, it is most definately on our radar screen.
Our next question is from Craige
I'm not sure if this counts as a small cap, but here it is