What Matters

There are lots of things we, as professional investors, cannot control. We cannot make Russia behave, although we wish we could. We cannot make the economy stronger, although it seems to be doing that by itself. We cannot control the rate at which the central banks increase interest rates, although the decisions they make will affect all capital markets profoundly. So, what can we do, and what matters about what we do?

Our job is to find good companies in which to invest our clients’ assets. We do this by way of constant research into new names, constant monitoring of the names we already own, and constant reading of the financial press to understand what is going on in the market, in order to find new themes and new ideas. Warren Buffett says he spends most of his time sitting in a chair reading. It seems to have worked out pretty well as a strategy. We are also voracious consumers of information, and for the most part, it has worked out for our clients too.

One way of knowing if we are doing our job well is to look at the performance of our portfolio companies. We should surely not be looking only at the performance of the stock prices, which over the short term have an element of randomness and volatility caused by any number of things. What matters, and what we should be looking at, is the actual revenue and earnings of each company, and the prospects for increased revenues and earnings going forward. We believe, and history shows, that companies that grow their earnings increase in value, and that over time (sometimes a longer time than we would like) that value shows up in the stock price. So how are we doing based on this measuring stick?

Below I have set out our ten largest equity positions which, together, make up about 40% of our stock holdings. I have included a brief paragraph about why we believe each company is valuable now and will be more valuable in the future. This is what matters, and this is what will determine our results as we go forward together.

Apple is the world’s most profitable company. Its focus on high quality products and user experience gives it a huge and loyal world-wide user base, which allows Apple to earn more revenues through adjacent products such as AirPods, Apple Music, and the App Store. The company has cash on hand of $200 billion which allows it to increase its dividend, buy back shares and make acquisitions.

Alphabet (Google) is the largest seller of advertising in the world through its own platforms such as Google Search Engine, YouTube, Maps, and Android. Alphabet will continue to benefit from the ongoing growth of digital usage, while its investments in AI and Cloud will improve its ability to target ads and generate revenue growth. Alphabet is sitting on over $170 billion of cash.

Microsoft is the largest enterprise software company in the world with leading positions in productivity software, cloud computing, and video games. Its deeply embedded position in companies around the world makes it very difficult to compete with and gives it great pricing power. Microsoft pays a dividend of 2.5%, and it has cash on hand to raise this, as well as to buy back shares.

TFI International is one of the largest trucking and logistics companies in North America. TFI’s strategy is to use its deep operational expertise to make acquisitions and improve operations to generate strong returns. We believe its recent acquisition of UPS’s less-than-truckload (LTL) carrier business transforms the revenue and earnings profile of the business and we expect good earnings growth going forward. The company’s stock trades at a very modest 15 times trailing earnings.

Brookfield Asset Management manages almost $1 trillion of “alternative” assets such as real estate, infrastructure, and renewable energy. Some of these assets are owned directly by the company but most are managed on behalf of partnerships. Brookfield collects management fees and takes a 20% interest in the eventual profits. We consider it to be among the best managed companies in Canada and expect to see exceptional growth in earnings.

Constellation Software is a collection of 500 or so mostly small “vertical-market software” businesses. Each such business provides a mission-critical role for a specific end-market (such as library-management software). Under CEO Mark Leonard, Constellation Software has built up strong internal capabilities to source and make acquisitions resulting in earnings compounding at over 40% per year over the last 10 years. With little fanfare, it has become the 20th largest company on the Toronto Stock Exchange. We see no near-term end to its growth.

Costco’s business model of offering a limited selection of high-quality products at low prices has gotten even stronger through the COVID pandemic, which allows Costco to lower prices even further, a critical edge during an inflationary period. We believe Costco can open many more stores in international markets such as China, while Costco’s strong reputation will allow it to gain market share in eCommerce. The membership model has proven to be very profitable and promotes customer retention.

Visa is the largest payment network in the world. It handles transactions among 15,000 financial institutions and 80 million merchants. On average it facilitates 635 million transactions per day. Visa provides the underlying infrastructure for digital payments and will benefit from the accelerating transition away from cash towards digital payments including credit cards, mobile payments, and e-commerce, while helping facilitate new payment flows such as peer-to-peer (P2P)payments.

Waste Connections is one of the largest solid waste management companies in North America providing collection, recycling, and landfill services with a focus on operating in smaller municipalities where there is less competition, leading to stronger pricing power. Waste Connections’ culture focuses on employee safety, providing a competitive advantage in a dangerous and difficult industry. Waste Connections will continue to grow earnings through acquisitions, while investing in renewable projects such as recycling and landfill gas capture.

National Bank is the 6th largest bank in Canada. Combining traditional retail and commercial lending, wealth management, and capital markets activity, National has been very profitable. We expect National Bank to outperform the other Canadian banks going forward given its focus on Quebec which will likely grow GDP faster than other provinces, has lower household and consumer debt, and has less housing-related risk.

Not every client owns each of these companies of course, and by highlighting these ten holdings, we in no way mean to diminish the other firms in which we have taken ownership positions. Building a diversified portfolio of leading companies, paying attention on a day-by-day basis to the progress of each one, and making changes as required, is the essence of our job. It is what matters.

David Baskin, Chairman


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