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Leith Wheeler Canadian Equity Fund Goes 2 for 2 in 4th Quarter

- By Sydnee Gatewood

The Leith Wheeler Canadian Equity (Trades, Portfolio) Fund disclosed in its fourth-quarter 2018 portfolio, which was released earlier this week, that it established two new positions and exited two others.


With the goal of generating superior long-term returns while protecting capital, the fund, which is part of Leith Wheeler Investment Counsel, uses bottom-up, fundamental analysis to find potential investments among a diverse number of undervalued Canadian companies that have stable earnings, long-term business models and good management.

Based on these criteria, the fund's portfolio managers opened positions in Great-West Lifeco Inc. (GWO.TO) and Baytex Energy Corp. (BTE.TO), and closed its Seven Generations Energy Ltd. (VII.TO) and Stantec Inc. (STN.TO) holdings.

Great-West Lifeco

The fund invested in 1.4 million shares of Great-West Lifeco for an average price of 29.72 Canadian dollars ($22.24) per share, dedicating 1.48% of the equity portfolio to the stake. It previously sold out of the stock in the second quarter of 2013.

The Winnipeg, Manitoba-based insurance company has a CA$32.63 billion market cap; its shares closed at CA$33.03 on Thursday with a price-earnings ratio of 11.05, a price-book ratio of 1.50 and a price-sales ratio of 0.75.

The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.

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As a result of issuing approximately CA$780 million in new long-term debt over the last three years, GuruFocus rated Great-West Lifeco's financial strength 5 out of 10. The company has also recorded a decline in revenue per share over the last 12 months.

The insurance company's profitability and growth scored a 4 out of 10 rating, weighed down by mediocre margins and returns. Great-West also has a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per year.

Leith Wheeler is the company's largest guru shareholder with 0.14% of outstanding shares. The Signature Select Canadian Fund (Trades, Portfolio) also has a position in the stock.

Baytex Energy

After selling out of Baytex Energy in second-quarter 2018, the Canadian Equity Fund purchased a new 12.16 million-share stake for an average price of CA$3.34 per share. The stake was given 1.10% space in the equity portfolio.

The oil and gas producer, which is headquartered in Calgary, Alberta, has a market cap of CA$1.23 billion; its shares closed at CA$2.22 on Thursday with a forward price-earnings ratio of 22.22, a price-book ratio of 0.41 and a price-sales ratio of 0.50.

According to the median price-sales chart, the stock is trading below its historical value.

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Baytex's financial strength and profitability and growth were both rated 4 out of 10 by GuruFocus. Weighed down by poor interest coverage and a weak cash-debt ratio, the low Altman Z-Score of -0.46 warns the company is at risk of going bankrupt.

While the company's returns outperform competitors, its operating margin underperforms 53% of industry peers. The Piotroski F-Score of 5, however, suggests operations are stable. In addition, Baytex's one-star business predictability rank is on watch as a result of a five-year decline in revenue per share.

The fund holds 2.19% of the company's outstanding shares.

Seven Generations Energy

Leith Wheeler sold all 2.8 million shares of Seven Generations Energy for an average price of CA$12.31 per share, impacting the equity portfolio by -1.39%. GuruFocus estimates the fund lost 52% on the investment since establishing it in fourth-quarter 2016.

The Canadian oil and gas producer, which is also based in Calgary, Alberta, has a CA$3.36 billion market cap; its shares closed at CA$9.54 on Thursday with a price-earnings ratio of 7.89, a price-book ratio of 0.71 and a price-sales ratio of 1.05.

Based on the Peter Lynch chart, the stock appears to be undervalued.

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GuruFocus rated Seven Generations' financial strength 5 out of 10. While the company has adequate interest coverage, the Altman Z-Score of 1.51 indicates it is under some fiscal pressure.

The company's profitability and growth fared much better, scoring a 9 out of 10 rating as a result of operating margin expansion, strong returns that outperform competitors and a high Piotroski F-Score of 7, which suggests business conditions are healthy.

No gurus are currently invested in the stock.

Stantec

The Canadian Equity Fund divested of its remaining 1.08 million shares of Stantec for an average price of CA$31.72 per share. The trade had an impact of -1.23% on the equity portfolio. According to GuruFocus, the fund lost an estimated -0.80% on the investment since establishing it in second-quarter 2015.

The Edmonton, Alberta-based engineering and construction company has a market cap of CA$3.62 billion; its shares closed at CA$32.38 on Thursday with a price-earnings ratio of 77.09, a price-book ratio of 1.92 and a price-sales ratio of 0.86.

The Peter Lynch chart suggests the stock is overvalued.

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Stantec's financial strength was rated 6 out of 10 by GuruFocus. Although the company has issued approximately CA$405.6 million in new long-term debt over the last three years, it is at a manageable level as a result of sufficient interest coverage. The Altman Z-Score of 2.84, however, indicates it is under some financial stress.

The company's profitability and growth scored a 7 out of 10 rating. Despite having declining margins and returns that underperform industry peers, Stantec is supported by a moderate Piotroski F-Score of 6 and consistent earnings and revenue growth. The three-star business predictability rank is on watch, though, as a result of assets building at a faster rate than revenue, which suggests it is becoming less efficient. GuruFocus says companies with this rank typically see their stocks gain an average of 8.2% per year.

With 0.89% of outstanding shares, the Mawer New Canada Fund (Trades, Portfolio) is now the company's largest guru shareholder.

Additional trades

During the quarter, the fund also added to a number of holdings, including Brookfield Asset Management Inc. (BAM-A.TO) and Winpak Ltd. (WPK.TO), and trimmed several others, like Brookfield Infrastructure Partners (BIP-UN.TO) and Cameco Corp. (CCO.TO).

The Canadian Equity Fund's $2.67 billion equity portfolio, which is composed of 37 stocks, is largely invested in the financial services sector. According to its fact sheet, the fund posted a -12.8% return in 2018, underperforming the S&P/TSX Composite Index's return of -8.9%.

Disclosure: No positions.

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This article first appeared on GuruFocus.