There is a natural progression of the due diligence process at QV that starts with screening for new ideas, doing deep research on attractive ideas, adding the best ideas to the portfolio and continuously monitoring them over time. Much of the heavy lifting is done before adding to an investment in the portfolio, but rigorous monitoring of portfolio holdings is needed as businesses and valuations are highly dynamic. Speaking regularly with management teams and doing site tours is an important part of the continuous learning aspect of monitoring portfolio holdings. With this in mind, the Canadian Equity team recently attended an investor conference based in Montreal. The event was well attended by management teams of many of our portfolio holdings and prospective investment ideas, and also included site visits of several companies. Below, I discuss some themes and learnings from this conference.
Investing Opportunistically
Many of the portfolio holdings we spoke with and visited are investing capital counter-cyclically through a tougher macro environment. This is possible as the companies have attractive, highly cash-generative franchises and strong balance sheets that they can deploy opportunistically. For example, Winpak noted that it is investing in increased capacity at its plant in Montreal and looking at acquisitions that complement its current healthcare product offerings, while continuing to return capital to shareholders through dividends and share buybacks. It also retains a net cash balance sheet that gives ample flexibility to continue to think opportunistically about capital allocation. Hearing from the plant manager of its Montreal site about the potential benefits from investments in incremental capacity and efficiency crystalizes management’s statement that these investments are expected to yield a high return on capital.
Increasing Efficiency
Another theme is that several companies are making incremental investments in technology to improve the quality of service and efficiency. For example, Cogeco’s recently appointed CEO, Frederic Perron, spoke about investments the company is making to roll out artificial intelligence-enhanced customer service technologies like chatbots in partnership with Google. In addition to cost savings that self-service tools like chatbots offer, they are leading to increased customer satisfaction as customers are able to get to resolutions more quickly. These investments are being funded from other cost-cutting efforts within the organization and, over the medium term, could have a positive impact on its market share and margins.
Strategic Rollouts
Another highlight was a site visit to Parkland’s stand-alone On The Run convenience store. This location in Montreal is one of only two stand-alone convenience stores currently owned by the company, but it is planning additional locations in the near term. The store manager walked us through the assortment and food preparation iterations they have implemented over the past year to ensure they are best servicing the local consumer economically. The differentiated offering that the company acquired from M&M Foods is complementary to its frozen food and grab-and-go assortment. We appreciate the time taken to test this concept before committing to a broader rollout and agree with management that there is good runway for stand-alone convenience stores, especially in high-traffic areas. There was also good discussion from senior management about some of the operational projects on which the company continues to make progress, including a broader rollout of its loyalty program and implementing a single enterprise software program across the whole organization.
It is important to ensure that we find different ways to engage with management teams and continue to learn more about our portfolio holdings and prospective investments. The observations from any one visit or conference may not seem overly significant, but collectively they add to our institutional depth of knowledge. Understanding all the levers in a business and the perspective of its managers could help us potentially add to it opportunistically when sentiment on it sours or there is a short-term road bump that we believe it can safely clear over the long term. A comprehensive focus on all parts of the investment process, inclusive of continuous monitoring of portfolio holdings, that continues to compound over time gives us a key edge that can potentially lead to better investment outcomes.