Greg Chan discusses how our disciplined investment approach allowed us to take advantage of a short term market dislocation in this Off the Cuff video.
Summary:
Welcome to another edition of Off the Cuff. My name is Greg Chan, Portfolio Manager at Empire Life Investments. Before I begin, I would like to take this opportunity to thank all the frontline workers. I hope everyone is staying safe and well.
Today, I will be talking about a new holding called Bombardier Recreational Products, or BRP. We initiated a position during the market selloff in early March. We have a long history with this company and BRP was previously held across multiple funds at Empire Life before we exited our position in September 2019 at around $52 as the stock was approaching our fair value.
BRP manufactures a number of power sports vehicles with a portfolio of brands that include ski doo snowmobiles, sea doo personal watercrafts, Can-Am off-road vehicles and Spyder roadsters.
BRP is a high quality company and has a number of characteristics that we look for at Empire Life. These include a market leadership position, ability to consistently outgrow their peers – which is a good sign of brand strength – they have a strong management team, the business generates high ROIC (Return on Invested Capital), and they have a solid balance sheet.
During the COVID-19 selloff, the stock went from a high of approximately $70 in early February to a low of about $20 in late March, which is a decline of 70% from peak to trough. We were an active buyer at this time and were able to chip away at shares for as low as $21. While the entire market sold off during this time period, BRP was a big outlier as there were fears that we were heading into a recession which has historically severely impacted sales of high priced discretionary products that BRP sells. Fast forward to today, several months later and the stock is up more than 150% from its March low. While fears remain that we are heading into a recession, this pandemic has proven to be different for BRP than previous recessions.
Due to the lockdown, families are foregoing travel and vacations and instead are looking for recreational activities at home. Management recently disclosed that in May and June, their retail sales increased over 35% and that new customers have grown from the historical 20% level to 30%. We are keeping in mind that if we do go into a prolonged recession this will likely impact future sales.
While we typically have a long investment time horizon and we thought our initial thesis would play out over the next year or two, the big V shaped stock rebound was much quicker than we expected and we recently exited our position at around $45 for a very healthy gain.
Before I end, I am going to highlight a few key takeaways:
- The big price moves in BRP over the last several months show that sometimes the market doesn't get it right in the short term which benefits active investing.
- Our long history with BRP and deep understanding of the company allowed us to tactically take advantage of short term market dislocations.
- Not only are we constantly following all our names in the portfolio and the overall market environment but we have an active list of companies on our watch list that we follow closely and we are patiently waiting for these stocks to hit our buy price.
Thank you very much for your time.
Segregated Fund contracts are issued by The Empire Life Insurance Company (“Empire Life”). A description of the key features of the individual variable insurance contract is contained in the Information Folder for the product being considered. Any amount that is allocated to a segregated fund is invested at the risk of the contract owner and may increase or decrease in value. Past performance is no guarantee of future performance. All returns are calculated after taking expenses, management and administration fees into account.
This document includes forward-looking information that is based on the opinions and views of Empire Life Investments Inc. as of the date stated and is subject to change without notice. This information should not be considered a recommendation to buy or sell nor should it be relied upon as investment, tax or legal advice. Information contained in this report has been obtained from third party sources believed to be reliable, but accuracy cannot be guaranteed. Empire Life Investments Inc. and its affiliates do not warrant or make any representations regarding the use or the results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and does not accept any responsibility for any loss or damage that results from its use. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Empire Life Investments Inc. is the Manager of the Empire Life Emblem Portfolios and Empire Life Mutual Funds (the “Portfolios” or “Funds”). The units of the Portfolios and Funds are available only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such units.
August 11, 2020
