A key to successful portfolio management is determining when a stock price decline is actually an opportunity to buy more. Sticking with a business after its stock price declines significantly requires an enormous amount of due diligence to ensure that our long-term thesis remains intact. I believe the three cases below, from Trimark North American Endeavour Class, illustrate this well.
We are always on the lookout for this kind of opportunity – temporary issues that cause the market to undervalue a company.
Lender Processing Services, Inc.
In 2011, the Fund endured a 50% drop in Lender Processing Services’ stock price. The company, a leader in consumer loan processing services, faced considerable challenges, which brought the stock price way down. Our confidence in the business didn’t waver. We took advantage of what we believed was a temporary situation and bought more shares at an even better price.
At the start of 2012, Lender Processing made up 9% of the Fund and was the number one contributor to Fund performance in 2012, rising 61%.
Shares in Rovi fell 60% in 2011. We continue to own this unique digital home entertainment technology firm. An example of the company’s technology is the online TV Guide, a segment in which it has 100% market share and 50% margins. Rovi’s shares continued to decline in early 2012, but have since rebounded more than 100% from the lows and we maintain our confidence in the business. This is evident in its current 8.8% weighting in the Fund (as at February 28, 2013). The company’s long-term growth should benefit from the continued proliferation of digital televisions and the opportunity for Rovi to increase advertising revenue from their TV guides.
PNI Digital Media Inc.
PNI Digital is the only company in this list that has yet to rebound. I’ve included it because it illustrates how we react in a situation when our conviction remains intact, but the Fund has yet to reap the rewards. In 2011, PNI’s stock price declined 41%. It declined another 41% in 2012 and closed last year at an all-time low. Despite these two disappointing years, we continue to believe in the long-term potential of the company.
The company runs the online photo businesses of virtually every major retailer in North America, including Costco and Shoppers Drug Mart. PNI is dealing with the transition away from traditional 4×6 photo prints to specialized items such as photo books or calendars. The company has invested ahead of demand in this area, which has negatively impacted its profitability.
We believe PNI holds a key position in a market with a bright future and that, in time, the company’s financials will improve. In the meantime, this strategic position is by no means accurately reflected in the company’s enterprise value of $7 million (Bloomberg as at March 15, 2013). We calculate it would cost around $41 million to recreate this company and its potential earnings power could make it worth substantially more. With a solid cash balance and break-even cash flow results, we believe our patience will be rewarded and thus the company holds a 6% weight (as at February 28, 2013) in the Fund. I look forward to writing about PNI’s upswing in future blog posts.
Trimark North American Endeavour Class
The Fund is not managed for any one-year period. Our goal is to produce superior after-tax returns over the long term. This means you can expect a portfolio that:
- Is highly concentrated (17 equity investments). Currently the top ten holdings make up 72% of the Fund (as at February 28, 2013)
- Doesn’t include companies with less than a 3% weighting (at purchase). If I don’t have enough confidence in a business to give it 3% of the Fund, it’s not a good enough idea.
- Doesn’t focus on what is cheap today, but on what will look cheap in hindsight, five years from now
As the examples above show, we believe that shareholders are well-served when we tune out the noise and stay focused on our investment discipline. We believe being different is the only way to truly outperform the market over the long term. When a stock price falls, it doesn’t necessarily mean it’s time to buy, but it might not be the time to sell either. You need to do some serious homework to make that call.
Note: The above companies were selected for illustrative purposes only and are not intended to convey specific investment advice.
Learn more about the Trimark Investments team.
Trimark North American Endeavour Class, Series A provided the following performance returns as at February 28, 2013: 1-year, 5.52%; 3-year, 0.57%; 5-year, 5.52%; 10-year, 2.66%. On August 10, 2007, the Fund’s investment objectives were changed. The performance of the Fund prior to August 10, 2007 would have been different had the current investment objectives been in effect during that period.