Invesco Canada blog

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Jason Whiting | August 6, 2014

Six degrees of small caps

If you work in the small-cap space long enough, you begin to experience Kevin Bacon’s six degrees of separation concept1. In this case, it’s my investments in Trimark Canadian Small Companies Fund that are linked in some way to other investments within the small-cap universe. I have been managing Canadian small caps for over three years, so I would like to share an example of this network effect and how it has benefited the Fund.

Throughout the entire time that I’ve managed the Fund, I have owned Newalta Corp. In fact, I have owned Newalta for nearly seven years, if you include Trimark North American Endeavour Class, which I also manage. Newalta’s main competitor is the former CCS Corporation, now known as Tervita. CCS was taken private in 2007 for $3.5 billion. The company was run by its founder and current chairman, Dave Werklund. During the 15 years CCS was public, it had a total return of 2,490%2 (24% CAGR).

In April 2012, I met with Phoenix Oilfield Hauling. Why did I take a meeting with a $24 million market-cap rig hauler that had almost gone bankrupt? Because the chairman and CEO was Dave Werklund.

Dave was on the board when Phoenix ran into financial troubles. He personally bailed the company out and now owns 50%. During the company’s hardship, Dave was looking to raise money to grow Phoenix. I was invited to a meeting – when someone has a track record like Dave Werklund, you take the meeting. I seized the opportunity and the Fund became the largest shareholder of Phoenix, after Dave Werklund. Phoenix is now named Aveda Transportation and Energy Services. I made my initial investment at $3.00 per share and Aveda has recently traded at $5.30 – that’s a 77% gain (on paper) in just over two years.

The story doesn’t end there. Knowing the competitive environment for Aveda, I became familiar with a private company called ATK Oilfield Services, run by Artie Kos. I had initially met with Artie in 2013 in order to better understand Aveda from a competitor’s point of view. However, ATK also turned out to be a very interesting opportunity and, subsequently, the Fund became a shareholder in ATK. One main reason is because of Artie Kos. Here’s all you need to know about Artie: A few years ago, the company held its Christmas party on December 23, and a customer called needing an urgent rig move. Most of the drivers had left for the holiday, so Artie and a few of his senior executives left the party and moved the rig themselves.

These examples demonstrate how important it is to be experienced within the Canadian small-cap sector. Over time, the network of companies and management teams can be leveraged to develop a number of profitable investments that benefit unitholders.

Turning back to Kevin Bacon: The movie Footloose cost $8.2 million to produce, and has posted a total lifetime domestic gross of $80 million3. I’m hoping Newalta will provide potential opportunities over the long term for Trimark Canadian Small Companies Fund.

Feel free to leave any comments or questions that you may have, and thank you for your continued support.

Learn more about Trimark Canadian Small Companies Fund and the Trimark Investments team. 

Note: The companies mentioned in the above article were selected for illustrative purposes only and are not intended to convey specific investment advice.

CAGR is the year-over-year growth rate of an investment over a specified period of time.

1Six Degrees of Kevin Bacon is a parlor game based on the “six degrees of separation” concept, suggesting that any two people are six or fewer acquaintance links apart.

2Source: Phoenix Oilfield Hauling Inc. investor presentation April 2012; FactSet Research Systems

3Source: www.boxofficemojo.com (http://www.boxofficemojo.com/movies/?id=footloose.htm)

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