High-conviction investing

Richard Fortin’s got guts. The Franklin Bissett portfolio manager has a history of buying stocks, like Major Drilling (MDI), that have poor near-term outlooks.

Fortin bought MDI for the Franklin Bissett Small Cap Fund in November 2012 at $9, and added to the position as the share price fell. Two years later, MDI trades under $7.

“We tend to play in underappreciated segments,” says Fortin. “Our top ten names are close to 50% of the portfolio. Our top ideas are high-conviction, and we’ll live and die by how they perform.”

The companies Fortin looks for are worth $300 million to $1.7 billion in the stock market. Portfolio turnover is between 15% and 30% per year. As of October 31, 2014, his small cap fund (now renamed Custom Franklin Bissett Small Cap Benchmark) returned 9.82%, compared to approximately 5.8% for the category average.

We spoke to him last year about his managing style.

What are your criteria for good companies?

The most important long-term determinant of stock performance would be ability to grow earnings and cash flow.

We like businesses that internally finance their growth, as opposed to having to come back to the market. Great businesses create value at the bottom of cycles by deploying capital. When everybody else is struggling, they grow their businesses.

Other criteria include above-average profitability, stable operating history and strong balance sheets. We prefer high levels of inside ownership.

What’s one perennial holding?

Furniture distributor Richelieu Hardware. Year after year, it’s grown earnings and increased market share both in Canada and the U.S. It’s a prototypical GARP (growth at a reasonable price) stock.

Why would you exit a position?

For risk management purposes, when Richelieu hit 8%, we trimmed. Our typical weight is 2% to 5%.

We’d exit if we found better investment opportunities elsewhere. Or if valuation became egregious, and there were successive stumbles in terms of operating results and successive poor quarters. Our valuation approach provides for a margin of safety.

Owning Sears Canada is a good example of using that buffer. The retail business has not performed well over, but they’ve monetized some below-market leases at a significant gain. If you apply that across their real estate portfolio, you get a value above the current share price [around $10.66 as of November 2014].

Updated August 2016.