Three high-conviction companies for the long term

There are three companies that fit senior portfolio manager Craig Jerusalim’s high-conviction recommendations for the long term: Intact Financial, Kinaxis and Cargojet.

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“These companies can fluctuate in the short term, and be whipped around by market sentiment,” said Jerusalim, who manages Canadian equities at CIBC Asset Management, in a late-August interview. “However, high-quality business models, product offerings and strategic market positions set them all up for long-term success.”

Intact Financial

One of Jerusalem’s long-term core holdings that consistently delivers, he said, is Intact Financial, Canada’s largest property and casualty insurer.

The company has “benefited from ongoing industry consolidation,” said Jersalim, who co-manages the Renaissance Canadian Dividend Fund. And this is “demonstrated by the return of industry pricing power, often referred to as a hardening [insurance] market.”

In August, Intact acquired two specialty insurers: The Guarantee Company and Frank Cowan Company. The $1-billion deal is expected to close in the fourth quarter.

As a result of these acquisitions, Jerusalim said, “Intact should be able to considerably increase profitability through stronger underwriting capabilities, broader distribution networks and lower cost structures.”

And Intact’s strong balance sheet puts the company in a good position to “continue making opportunistic tuck-in acquisitions, both in Canada and south of the border,” he said.

Intact has a stated goal to out-earn their industry peers by over five percentage points due to their scale and the competitive advantages from technology, added Jerusalim.

Intact’s stock has risen steadily this year and is trading above $133 this week. It’s one-year return is 27.5%, according to Bloomberg.

Kinaxis

A mid-cap Canadian software company, Kinaxis is slightly riskier than Intact, Jerusalim said.

“But [it] has the potential for a much greater pay off. Their best-in-class product offering allows their customers to anticipate complex demand requirement, perform scenario analysis [in] real time, and optimize their customer’s global supply chain planning.”

Kinaxis also trades at a 40% discount to its statistical analysis system (SAS) peers, Jerusalim said, and partnerships with global consulting firms — including Accenture, Deloitte and Infosys — should allow the company to grow.

“Unlike many other high-growth tech companies, Kinaxis is already profitable today, even as their growth begins to re-accelerate,” he said.

Kinaxis’ stock was trading above $85 this week, after starting the year around $65. Its one-year return is -10.5%, according to Bloomberg, after a significant drop last November.

Cargojet

Based out of Mississauga, Ont., Cargojet operates cargo delivery in Canada and internationally.

“With 95% market share, they’re a virtual monopoly and demonstrate strong pricing power,” said Jerusalim. “They are fully levered to ongoing e-commerce growth, and the investments they’ve made to date set up impressive operating leverage in their business.”

Cargojet recently announced a partnership with Amazon, which will own 15% of Cargojet over time. Further, Cargojet will benefit from adding flights to existing routes and moving to seven-days-per-week service, Jerusalim said.

“There are very high barriers to entry due to scale and first-mover advantage, and the company has built in very attractive pass-through mechanisms to deal with volatility in fuel, weather and pilot costs,” he said.

“The upside for Cargojet comes jointly from rapidly growing earnings and free cash flow, as well as multiple expansion, commensurate with other high-quality oligopolies, such as the rails or regulated pipelines.”

Over the last year, Cargojet’s stock has returned 12.8% to investors, according to Bloomberg.

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