From the Desk of Irwin Michael – April 17, 2015

Since the beginning of April, ABC Funds continued its pursuit of attractively valued securities. Although this month has been characterized by volatility in North American market indices, energy prices, and the U.S./CAD exchange rate, we have taken many initiatives. Firstly, the Funds have hedged approximately 80% of their U.S. dollar exposure through a series of forward contracts with the Royal Bank of Canada. We have been finding much more value in the U.S. markets and prudently hedged a majority of our currency exposure. Secondly, we have had the opportunity to trim many of our existing positions at favourable prices, including Mentor Graphics, Gilead Sciences, Regal-Beloit Corp., and Encore Wire Corporation. Moreover, we have sold our entire position in Cooper Tire & Rubber feeling that its price had run ahead of itself. With the proceeds of our sales, the Funds purchased new securities. For instance:

The ABC Fully Managed Fund purchased DH Corp’s 5% Sep. 30/2020 convertible debentures from its recent offering. DH Corp is a technology services provider to financial institutions in North America offering lending technology, loan and credit card services, cheque programs, etc. We believe that the debentures offer an attractive yield in the context of a low interest rate environment. Moreover, we believe that the company has a strong growth profile, which should offer potential upside with the convertible option.

The ABC Fundamental Value Fund purchased Parker-Hannifin Corporation, a diversified American manufacturer of motion control products servicing the industrial sector, but primarily the aerospace, climate control, and electrical/mechanical segments. The company has a $17.3 billion market capitalization, a 15.0x forward price earnings ratio, and an approximate free cash flow ratio of 6.7%. In addition to its very attractive valuation, Parker-Hannifin is a “dividend aristocrat” and exhibits a current yield of 2.0%. Although the company has foreign exchange risk, we believe its remarkable free cash flow potential, excellent balance sheet, and superior market position offers excellent capital appreciation potential.

The ABC American Value Fund purchased Express Scripts Holding Company, a full service pharmacy benefit manager serving clients throughout North America. Its primary customers include managed care organizations, insurance carriers, employers, and union-sponsored benefit plans. The sector has seen consolidation, such as UnitedHealth’s recent acquisition of Catamaran for $12.8 billion. Although Express Scripts does not pay a dividend, the company has an impressive free cash flow yield of over 7% and has been using excess cash to buy back its common stock.

The ABC North-American Deep Value Fund purchased H&R Block, a financial services company that provides tax services to clients throughout the world. The company has an attractive valuation, exhibiting a trailing price earnings ratio of 13.5x, a dividend yield of 2.5%, and a free cash flow yield of approximately 7%. H&R Block has attractive financials, a superior market position, and a strong balance sheet. It is our view that the company should do well as unemployment continues to decline in the United States and as the global economy improves. Moreover, with its inexpensive valuation and low capital expenditure requirements, we believe that H&R Block might be a take-out candidate.

The ABC Dirt-Cheap Stock Fund purchased Zimmer Holdings, which designs, develops, manufactures, and markets orthopedic, dental reconstructive implants, and other products. The company’s main products are hip and knee replacements, which we believe will be a growing market considering the aging baby boomer population. We believe that the company is a market leader in its business segments and has exhibited remarkable growth in revenue and earnings per share over the past few years. The company has a market capitalization of $19.5 billion and a dividend yield of 0.77%. Zimmer currently trades at a forward price earnings ratio of 15.0x and has a strong balance sheet; as of the end of Q4 2015, the company had a net cash position of approximately $270 million. A big catalyst for the company is the closing of its $13.4 billion acquisition of Biomet, which will lead to a combined company with enhanced cross-selling opportunities. We believe that Zimmer is a market leader in the musculoskeletal industry and should do well in the coming years.

These are but a few of ABC Funds’ new ideas and we will continuously look for new opportunities.

Irwin A. Michael Signature

Irwin A. Michael, President
I.A. Michael Investment Counsel Ltd.

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