Finding stocks that are destined for strong growth has been tough in recent years. We asked Jeffrey Tory and Nicolas Chevalier from Pembroke where they look for attractive investments
Finding stocks that are destined for strong growth has not been easy in recent years. Companies have been forced to cut costs and earnings have slowed. Achieving growth, whether top line or bottom line, has been increasingly difficult. But is there anywhere that investors can seek solace in Canada’s low growth environment?
“Although it’s tough to find growth companies, we’re quite optimistic in the asset class that we look at, which is small cap growth companies,” says Portfolio Manager at Pembroke Management, Nicolas Chevalier. “These companies are able to achieve growth because they offer differentiated products or services or because they come up with new designs or ways of doing things. They are able to either invent new industries or gain market share, and we’re optimistic that some of these smaller cap companies can grow even in a tough environment.”
The portion of a portfolio that a client is prepared to put into small cap depends on their risk appetite, but Pembroke Chairman, Jeffrey Tory, finds that people typically have between 10 – 30% of their portfolio invested in small caps. “We don’t claim to be reaching for 10% or 15% returns,” Tory says. “But at the end of the day we’re active investors and we need to beat the passive alternative, which is an ETF or investing in the index. We’re always trying to beat the market; that is the goal.”
Tory has noticed the attitudes and perceptions of investors shift in recent years, something he puts down to increased media coverage and the Internet. “Investors now measure their investments much more often than they used to, and the more they look at the results, the more afraid they become – it’s called myopic loss aversion and it makes people very jumpy,” he says. “One way around that is to encourage clients to invest with people who take a long-term view. For us, backing entrepreneurs who are creating something super positive takes away some of that investor negativity.”
As well as examining the business model, Tory and Chevalier also pay close attention to an organization’s management team when looking for potential growth companies. “We try to gets checks on the people and ascertain whether these individuals are honest, hardworking and have high integrity,” Chevalier says. “We also look for them to be shareholders in their own business, so there’s an alignment of interest. It’s not only important for us to have our money invested alongside our clients, but for management teams to also have money invested – that means all three parties have capital at risk.”
In the modern age of media noise and the availability of minute-by-minute stock data, Tory encourages advisors to help their clients focus on the investment basics. “With those clients who have become disillusioned with stocks, advisors have to convince them that owning a good portfolio of stocks is a much better place for your money in the long run, any data will prove that,” Tory says. “Because bond yields have been so low this year, investors have been desperate for income and reaching for yield.”
Chevalier highlights the importance of not allowing a client to chase hot sectors. “When REITs do well, people pour money into them, when oil and gas or gold stocks start to perform well, that's what people want,” he says. “We try to encourage people to have a consistent investment policy and to not chase and reach for yield, because that is very harmful.”
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