Investorsfriend.com - Newsletter May 11, 2002
Updates
Stantec and Mapleleaf are updated.
New Research Available
Some of my latest Stock Picks are now
available exclusively at Baystreet.ca under "analyst research", BayStreetPRO is a
monthly fee based service. You can try it free for two weeks by registering at
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I encourage everyone to try the two week free trial. You get access to my
latest research as well as other features of BayStreetPRO. I am providing
research to BAStreetPRO in return for a small share of the membership fee. I
have no ownership or management role in BayStreet.ca. Go to
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Please let me know what you think of BayStreetPRO.
Stantec's Smart Growth Strategy
Stantec has recently grown partly through a large
number of acquisitions of smaller Engineering Consulting Firms including six
acquisitions in 2001.
It's important to note that these were all non-publicly traded companies.
Privately held companies tend on average to be available cheaper than
publicly traded companies. Private companies can typically be purchased for a
lower multiple of earnings compare to publicly traded companies. The owners of
private firms cannot easily dispose of their shares. Investors will typically
pay more for a publicly traded company than a similar private company because
the investor can easily sell the public shares if he or she needs the money or
otherwise wants out of the investment.
Since Stantec is a publicly traded company, Stantec adds immediate value to
the privately held firms acquired. For example Stantec may be able to buy a firm
for say 8 times earnings, but because the investment then becomes public,
Stantec's value may rise say 16 times the amount of earnings purchased. In this
ideal scenario Stantec would be creating $2.00 in value for each $1.00 it spends
on acquisitions. I can't prove that this is happening at Stantec, because I
don't have all the data, but I strongly suspect something along these lines is
occurring.
Contrast this with companies that go around buying publicly traded companies.
In that case the acquiring company usually has to pay a premium, which is often
over 50% of the value of the acquired company. Often there are few synergies and
so these companies end up creating perhaps 66 cents of value for each dollar
spent on acquisitions. So in that unhappy case the company destroys 34 cents
every time it spends a dollar on an acquisition. I suspect Nortel was a champion
at that game, my sense is that with every dollar they spent on obscenely
over-priced acquisitions since about 1999, they probably destroyed something
over 90 cents in value.
In some cases, buying publicly traded companies is okay but overall it is pretty clear that a strategy of buying private companies at a
discount to what they would trade at on the stock market, is far superior to a
strategy of buying, at a premium, companies that are already trading publicly.
There are a number of other companies that generally buy private rather than
public firms. One of the most prominent and most successful is Warren Buffett's
Berkshire Hathaway.
For more information on Smart Growth Strategies versus Dumb Growth Strategies
see my article on growth strategies.
INCOME TRUSTS
I suspect that most investors don't really understand Income Trusts very well. I made several
visits to Chapters and found almost nothing on the subject. Investment
books and income tax guides that I browsed had little information on Income
Trusts. An internet search also turned up little.
But Income Trusts have performed extremely well in the markets and are an
important asset class. I was able to compile some useful information, see my
article on Understanding Income Trusts
MEMBERSHIP
Membership in this site increased by only about 11, to 997, since last issue.
It seems my site is longer listed in the Google search engine for some reason.
It may be because of the change in the URL, although investment-picks still
works.
Last month I got a lot of new members from your referrals. Please continue to
refer your contacts to this Site. A growing membership list is a motivator for
me to keep providing this service. If any of you frequent stock message boards,
please consider placing a link to this Site.
Shawn Allen, Editor