As markets continue to fall, let me reiterate my belief that fundamental, bottom-up research works. Not every day, but over time. The patience of our investment process was rewarded last week when Toronto-based Capstone Infrastructure Corp.(CSE) agreed to be bought by iCON Infrastructure Partners (a private equity infrastructure fund) for $4.90 per share in cash – a 44% premium to market close on January 19, the day before the announcement, and up 61% from before word of a possible deal leaked.1
CSE, an owner of power infrastructure assets (water utilities, wind power farms, etc.) was a 2.87% weight in Trimark Canadian Small Companies Fund (as at December 31, 2015). This is a great example of an investment thesis coming to fruition. I initially bought CSE after the company reduced its dividend in late 2011. I added more along the way, ending up with a cost basis of approximately $3.56.
The thesis was based on the idea that on a sum-of-the-parts basis, CSE was cheap. It owned a collection of good, stable assets. While investors’ knee-jerk reaction was to sell because of a lower dividend, I believed CSE’s assets were worth well above the post-cut stock price and the dividend payments did not affect this value. After my initial purchase, my additions to the CSE position in the Fund were at times when investors were concerned about the new (lower) dividend. Because I based my valuation on my own research of the company’s assets rather than the dividend, I had confidence during those times of worry.
CSE’s management team tried to create shareholder value along the way, but the market didn’t give it credit. Eventually, a takeover was required to reveal the value that the market was missing. Overall, I got a roughly 8.3% yearly return on the stock, plus collected an approximately 8% yield while I waited.2
Potential takeovers are never considered as part of our investment thesis, but as investors who look for underappreciated companies, it occasionally happens because we’ve seen something that the market overlooked – and so has a larger company with an eye for acquisitions.
It took time, but a patient approach backed by a sound discipline paid off. Something to remember as volatility dominates markets.
If you have any questions, leave them in the comments area below and I’d be happy to answer them. Thanks for reading.
1 Source: Capstone Infrastructure press release. The proposed deal is subject the regulatory approvals and shareholder vote.
2 Source: FactSet Research Systems Inc., as at January 22, 2016.
Note: The above company was selected for illustrative purposes only and is not intended to convey specific investment advice.