Stock Idea…Stantec Inc

Stock Idea…Stantec Inc

Symbol : STN

Exchange: TSX

Market Cap : 3.7 Billion

Revenue : 5.1 Billion
Three Year Revenue Growth : 26.7 %
Investment Type : Mid Cap Value/Growth

Price/Earnings : 37.9

Forward P/E : 15.9

Price/Book : 1.9

Price/Sales : 0.7

Price/Cash Flow : 14.0

Price : 32.21
Investment Stem : My own investment portfolio
                                 Cheap Small Cap Screen
                                 Cheap Small Cap Screen Two
 
Stantec Inc provides professional services in the area of infrastructure and facilities for clients in the public and private sectors. The company's services include planning, engineering, architecture, interior design, surveying and project management.

Stantec Inc. is a provider of professional services in the area of infrastructure and facilities for clients in the public and private sectors. The Company's operates through four segments Consulting Services-Canada, Consulting Services-United States, Consulting Services-Global and Construction Services. The Company's services include engineering, architecture, interior design, landscape architecture, surveying, environmental sciences, construction services, project management, and project economics, from initial project concept and planning through to design, construction, commissioning, maintenance, decommissioning and remediation. The Company provides professional consulting services in engineering, architecture, interior design, landscape architecture, surveying, environmental services, project management and project economics in the area of infrastructure and facilities, principally under fee-for-service agreements with clients.

The dreaded metrics from Morningstar…

http://quote.morningstar.ca/Quicktakes/stock/keyratios.aspx?t=STN&region=CAN&culture=en-CA&ops=clear

The company’s website…

https://www.stantec.com/en

Recently punished by the market (the crowd), after they announced their quarterly earnings, their costs went up due to the integration of a recent acquisition (water company in the states) which should be accretive to earnings and cash flows in the longer term. Management has a solid record of good capital allocation. Dividend yield of 1.71...Dividend was first initiated in early 2012 with a 5 year dividend growth of 10.8 percent. The dividend growth indicates that management is confident they can grow their cash flows and earnings in the future Sometimes the market over-reacts to a short term event (quarterly earnings) and puts the stock of a good company up on sale. This is one of those times. An opportunity for the individual investor who can stand apart from the crowd and think for himself.

Lessons Learned from Brookfield Asset Management’s CEO, Bruce Flatt

Lessons Learned from Brookfield Asset Management’s CEO, Bruce Flatt

We work hard to institutionalize the lessons we learn in our business in order to prevent the repetition of mistakes as we grow. This has become a core part of our culture, and experience has shown that doing this enables us to continue to become better at what we do.

Over time, we have found that the five most important principles to successful real asset investing are to: stick to what we know; ensure that we are diversified; buy at a discount to replacement cost; focus on quality assets and businesses; and finance with asset specific non-recourse debt.

We have also found that the single greatest way to dig ourselves out of mistakes is to be patient with investments and, in most cases, double down. This is the best way to recover losses, although it requires conviction as well as availability of the necessary capital. This is particularly important when we have acquired a good business, but our timing was poor. Doubling down in this case is virtually always the answer. However, one has to be careful because if the business is just a bad business, it only serves to compound the pain. But, generally we have found that in the absence of technological change in the extreme, doubling down and being patient is the most proven way to turn around an investment.

In addition to these principles, we have tried to institutionalize the lessons learned from our mistakes. Our five most important lessons are:

1) A bad business is usually just a bad business. We have found that some businesses, no matter how deep the discount to replacement cost, are just bad businesses. In these circumstances, there is essentially no price that can be paid to make up the cost of turning it into a viable business. These risks are most often found and magnified when technological change is affecting a business. The skill to be able to determine if a business is one or the other is the difference between a great value investment and a loser investment. In these situations, we must always be vigilant to ensure that our historical knowledge bias to just do what we have always done, along with our tendency to double down, does not keep us in a business that is destined to decline.

2) Development and approval risks in new businesses are often underestimated. When we develop assets ourselves, the process of acquiring approvals is methodically secured over time, often involving significant relationship management. In the alternative, when a business that has significant development and approval risks is acquired, the approvals can sometimes disappear with the departure of management or the mere change in circumstances as local officials revisit their perspective. This has affected us in real estate and infrastructure developments. As a result, we are very careful when acquiring companies with development projects, ensuring that we only allocate nominal value to these projects.

3) Currencies really matter. As a global investor that benchmarks return in U.S. dollars, the local return in a currency is relevant, but not what really matters to us. Earning a 20% compound return in a local currency and losing all of it with a currency loss still results in a zero return. To ensure we manage these risks, with many low-cost currencies in developed markets (Euro, Pound, Aussie, Kiwi, Loonie) we often hedge back to the U.S. dollar, provided the financial hedge risks are not too large. With high-cost currencies (Rupee, Real) it is difficult to justify hedging on longer-term assets. As a result, we invest capital when markets are stressed and foreign direct investment is low. This usually means that the currency is low, or at least has a greater chance of being more fairly valued. On the flip side, in these markets it is important to be more transactional in nature; therefore we often sell all or portions of assets as values increase. We rarely leave the countries entirely, but protecting our capital helps mitigate risk.

4) Structured financial deals often hide asset imperfections. The financial markets are filled with schemes to enhance returns where the returns do not otherwise exist at the levels promised. This is particularly acute when values are high, or interest rates are low. Often this takes the form of imprudent leverage, camouflaged by structured products or mismatched risks (the most recent example – the numerous VIX Volatility products sold to investors). In these circumstances, seldom do the long-term returns work out as structured, as changing the long-term characteristics of assets with financial engineering is impossible. Some, such as traders, may profit from these, but it is usually from on-selling the product at a higher price prior to its collapse. This is not how we invest. We therefore avoid participating in structured products, or investing in anything in which small annual returns can be offset with an improbable (but possible) outsized capital loss. Rarely have we made this mistake, and hopefully never again.

5) The nature of debt and maturity profile is critical. With the exception of modest amounts of corporate debt used for largely “flex” or “bridging” purposes, we limit recourse of debt to specific assets and virtually never guarantee debt across the company. This compartmentalization is the difference between problems with debt and easily moving through tougher periods in the capital markets. This includes not cross-collateralizing assets and avoiding parent or any affiliate guarantees to ensure that risk is compartmentalized. Furthermore, we keep loan-to-value appraisal covenants which require capital top-ups to a minimum, and avoid maintenance covenants if at all possible. Bottom line, we will never risk the company, any fund, or any investment with a financing strategy.

Excerpt from Bruce Flatt’s letter to shareholders, 4^th quarter 2017

Good Investing is a Solitary Practice, Two

Good Investing is a Solitary Practice, Two

Many markets are centered on the physical arenas known as ‘exchanges’; others are established purely through the internet, linking willing buyers and sellers. All however have common characteristics. The first of these, strangely enough, is that it is actually very difficult to identify a physical body of people that constitutes the market ‘crowd’. The investment community is a far larger, far more amorphous and far less tangible construct than the group of people who are physically on the floor of an exchange, or who are actually executing transactions over the net.

Market crowds are primarily a psychological phenomenon rather than a physical one where being part of a crowd puts an individual in possession of sort of a collective mind which is more than the sum of its parts. A crowd has an effective ‘mind’ of its own and each member of that crowd has his behaviour altered by what the crowd thinks and believes. It has its own collective consciousness where the individual’s ability to remain self-aware and think logically, becomes suppressed. Crowds by their very nature only recognize the obvious, driven by their emotional non-rational nature of being part of a herd…as their individual self-awareness fades into the background,  crowd members morph into an expectant state of attention, making them vulnerable to suggestion and manipulation. In short the individual investor becomes part of the crowd’s belief system or if you will, part of the crowd’s dream or thought-form.

It's important to stand apart from the crowd as best you can. One way of doing this would be to develop an awareness of your 'awareness of being.'

awareness...having knowledge of something through observation of how one thinks and feels.
being...........a state of existing

Try to develop your intuition (insight=seeing within). You must try to allow your thinking mind to become aware of your feelings and your other senses. Get in the habit of self-observation. In this way you will be better equipped to think for yourself and not be so easily swept away by the crowd you are part of.

It's important to be aware and have control over how you think because if you don't, there are others in this world that will do it for you.

Good Investing is a Solitary Practice

Good Investing is a Solitary Practice

When I first started to invest I felt compelled to talk about the stocks I just had just bought. Looking back I was probably looking for confirmation of my investment ideas. After I experienced a few early successes I sought out investment blogs where I voiced my opinion on my stocks and the market in general. This all was fun of course but looking back it was dangerous as well. My ego wanted everybody to know how well I was doing so I could thumb my nose to the world and everybody else who disagreed with me. Consequently, when I hit a rough patch, I would get down on myself and even irritable when the stock market wasn’t agreeing with my assessment of the stocks I was holding. Arguments ensued with other investors where things quickly gravitated to a war of egos. This is all part of the learning curve of investing in the stock market.

Sometimes I would sell an under performing stock only to watch it soar up afterwards (recency bias) or an out performing stock which I held would top out and crash back down. This would play havoc with my emotional equilibrium. I learned the importance of the psychological aspect of investing and that you will not always be right about everything you buy. Mistakes will happen, investing is an art form not a science where you have to go beyond what the hard numbers mean. As time passed the market gradually taught me its lessons.

Good investing is a solitary practice. This is the very antithesis of the way the financial industry operates where teams of investment committees and box-checking consultants seek out compromises that gravitate towards a consensus of doing the safe non-threatening thing so as to protect their reputation and in so doing their jobs. The result is mediocre performance and index hugging (we can all go down together but I can’t let them go up without me). The individual investor at home who is focused on one portfolio made up of his own money has a huge advantage in this area as long as he is psychologically squared away within himself.

Volatility is your friend, not the enemy and becomes even more of a friend when you extend your time horizons. But to live with volatility you have to have the courage of your investment convictions. This usually means you have to have to believe in what you are doing and your investment philosophy. If you are going to hold for the long term you should try to partner yourself up with management teams that have that same mindset. Seek out share-holder friendly management that have a history of allocating the companies capital productively over time.

Volatility will also present you with investment opportunities where good companies with a long term focus get sold off indiscriminately when they miss their quarterly numbers. Or maybe they will fall victim to a market or sector sell-off where the baby gets thrown out with the bath water. The astute solitary investor will deal with the uncertainty of the moment and take advantage of the opportunity the markets presents himself with and buy up these sold off stocks which come with a built-in margin of safety.

In time the solitary investor will learn that his greatest resource lies within himself. Once he realizes this he will have a greater ability to utilize the resources that lie outside of himself.

 

Trusting the Process

Trusting the Process

You have bought a few stocks and set up your investment portfolio, and you feel confident that you have done your due diligence and have constructed a good investment portfolio…then soon after the market takes a violent downturn bringing all your holdings down with it. What does it feel like? How do you feel about it? Consternation, worry, panic…”oh my god, I’m going to lose all of my money.” What will I do? How can I get it back? Your survival (fight or flight) instincts take over and you sell everything. The market then suddenly reverses up leaving you looking on, pulling your hair out the sidelines.

You were so caught up in worrying about an abstract future and regretting the equally abstract past that you forgot to operate in the present. When investing in the stock market, your biggest adversary will be yourself and how you handle your investment situation when things turn against you. Do not focus on the outcome (the future), but instead concentrate on your process (the present). And if you don’t have a process, try to develop one. You have to evaluate the current market environment sure…but only as it impacts your present investing opportunities. Are stocks cheap or expensive? Are there many opportunities to buy companies trading below their intrinsic value? Or are the pickings harder to come to come by.

Focus on the internal workings of the company…management’s ability to allocate investment capital, cash flows from operations, the amount of debt and how it is structured and so on. If you invest in the right companies at the right price, it doesn’t matter what the market does. In the long run and that’s the only time frame you should be concentrating on, you will do fine; that all should be part and parcel of your investment process. Investing in the stock market is primarily a psychological process and having a process in place when you invest is a good way to keep your bearings when things turn against you.

The corner stone of your investing process will come from good judgement, which comes from experience, which in turn comes from bad judgement. Learning from your past mistakes is the investment you will make that will contribute to your present investing process. 

Stay in the present, that's where your resources are...

Enjoy the Journey

Enjoy the Journey

To be a successful investor over the long term, you have to enjoy the journey. Be willing to take up the mantle and enjoy the challenge of investing. If you’re the type that’s going to lose sleep after the first market dip (or worse yet, if you’re going to panic out of your well-thought-out investment positions just because the market falls), then maybe a more passive approach would be better suited for you. In fact, if you’re not going to enjoy the “game,” you probably shouldn’t be investing for yourself at all.

With that being said, there are definite benefits by successfully managing your own investments. While everybody knows what money can’t buy, there are obviously things that money can buy: a sense of security, a comfortable retirement, an ability to provide for your family. And for myself, a sense of empowerment along with the satisfaction of employing a skill that over time will enable me to enjoy the sweetness of beating the odds and the belief that “it can’t be done.”

Some people – including the renowned eighteenth-century economist Adam Smith, believed that when you pursue your own self-interest, the whole of society benefits. In the stock market, the buying and selling of stocks creates a market for corporate equity and ultimately provides a vehicle for productive businesses to raise capital and expand. While true, this kind of thinking can only go so far. In other words enjoying the game has to be more than just making money because in the end making the money is just another way of keeping score.

While to many, “time is money,” it’s probably more universal to say that “money is time.” After all, time is the currency of everyone’s life. When it’s spent the game is over. One of the great benefits of having money is the ability to pursue those great accomplishments that require the gifts of time and being. So, while money can’t buy you happiness or even satisfaction, it might buy you something else. If viewed in the proper light, it can buy you time – the freedom to pursue the things that you enjoy and that give meaning to life.

Resources

You Can be a Stock Market Genius

Joel Greenblatt