By Scott Ronalds
Quick background: CGOV Asset Management is the manager of our Equity Fund. The firm has a distinct investment process, one facet of which is that they won’t own more than 25 stocks. We love this discipline as it ensures they focus on their best ideas and don’t dilute the fund with ‘filler stocks’. If they are at the upper limit of holdings and see a new investment opportunity they want to add to the portfolio, it has to be more compelling than one of the existing investments in the fund.
This situation recently unfolded with Westshore Terminals (buy) and Rogers Communications (sell). Westshore is the largest coal loading facility on the west coast of North and South America. It generates revenues based on volumes of coal exported through the terminal to 20 countries around the world (with heavy volumes to Asia). It is one of the few ‘pure-play’ infrastructure stocks in North America and has promising growth prospects given the rising levels of resource consumption in Asia. The company has been on CGOV’s watchlist for a while but the stock’s valuation had never been compelling enough to add it to the fund (and displace another holding).
Along came Cape Apricot, a cargo ship that crashed into one of Westshore’s two berths in December and put it out of service for several weeks (sending the stock down too). By mid-February, the company had made sufficient repairs to permit resumption of normal operations, but at this time Westshore announced a $210 million capital expenditure program which will replace some older equipment and enhance operational efficiencies. To fund the program, the company announced that it plans to fix its dividend (at $0.33/quarter) until 2017 and issue short-term debt. This disappointed investors, as Westshore has historically paid a high, rising dividend (albeit volatile at times) and has been a popular holding for income investors. The stock slid on the news and by late February had fallen close to 15% since December.
Around the same time as the Westshore cap-ex announcement, Rogers was reaching a new high. In fact, the stock had risen about 50% over the past two years. It had been a profitable holding in the fund, but was no longer cheap in CGOV’s view. Considering the price decline in Westshore and the fact that the business remains solid and will have a fully modernized facility in a few years’ time, the manager decided that Westshore represented a more attractive investment than Rogers. The former was bought and the latter was sold – an example of the 25 rule in action.