Manager Insight

"Chicken plays" are among Galibier founder Joe Sirdevan's picks.
By Jade Hemeon | 31/05/18

Since Joe Sirdevan, founder and CEO of Toronto-based Galibier Capital Management Ltd., took over Steadyhand Small-Cap Equity in August 2016, a chart of the fund's performance bears a strong resemblance to the mountainous region in France after which Galibier is named.

About the Author
Jade Hemeon is a Toronto-based freelance financial journalist with more than 20 years experience. She has previously been a staff reporter for the Financial Post and Toronto Star, and has also held positions in the mutual funds and financial planning industries.

After a couple of months of rearranging the portfolio to his liking, with some ups and downs along an ascending path, Steadyhand Small-Cap achieved a cumulative return of 26.8% between Sept. 30, 2016, and April 30, 2018 -- a far superior performance to the S&P/TSX SmallCap Index's skimpy gain of 2.7%.

An avid cyclist, Sirdevan applies the same energy and determination required to ascend the arduous Col du Galibier in the French Alps, one of the longest uphill climbs in the Tour de France, to managing the fund. "We look for companies that possess an enduring, sustainable competitive advantage, and that dominate a small or niche industry," he says.

A disciplined bottom-up investor and contrarian, Sirdevan likes to buy growth at what he describes as a "reasoned" price, referring to all the calculations that go into determining a company's future value. He'll trim positions when companies become expensive. His process involves strict analysis of earnings, cash flow, balance-sheet strength, management capabilities, competitive position and growth prospects. He and his team project into the future and, using reasonable economic assumptions, model how a company will look in three to five years. Applying a conservative annual discount rate to projected financial results, they then calculate the stock's intrinsic value.

Sirdevan runs a concentrated portfolio, focusing on what he considers the best 20 to 30 opportunities in Canada and the United States. "We invest in companies where we have confidence in their future earnings power, based on the economics of their products, geography and potential for capacity expansion."

For example, a key holding is Intertape Polymer Group Inc. (ITP), a packaging leader that makes a variety of industrial adhesive tapes, including tape used for sealing mailed packages. Sirdevan refers to Intertape as a "chicken play" -- his term for a small-cap company that acts as a supplier and thereby rides the success of a larger, more expensive company; in this case, the online-shopping giant  Amazon.com Inc. (AMZN)

When Sirdevan assumed management of Steadyhand Small-Cap Equity from Montreal-based Wutherich & Co. Investment Counsel Inc., the fund had 17 positions. Sirdevan has since broadened it to 25. Previously, the fund also had a "large bet" in the energy business with a sector weight of 24%; he has brought it down to the 5% range. "We've increased diversification with more names and more themes," Sirdevan says. "There's no concentration of exposure to a volatile sector like energy."

The fund does have some energy exposure with its holding in  MEG Energy Corp.(MEG), but doesn't own any mining or forest-products companies. In recent months, Sirdevan has been paring down his holding in MEG shares, taking advantage of firming oil prices and investor recognition of the company.

The fund's low exposure to resource stocks is a key differentiator compared to the resource-heavy S&P/TSX SmallCap Index. "Most companies in the extractive industries such as mining and energy don't meet our criteria of having an enduring, sustainable business, along with steady growth in earnings and cash flow," Sirdevan says. "Resource companies are tied to commodity prices, and are often driven by geopolitical events. They tend to be cyclical."

Sirdevan initially increased the fund's exposure to U.S. companies. His investable universe is defined by Canadian-based companies with a market capitalization of less than $4 billion and by American companies with less than US$10 billion.

Steadyhand Small-Cap Equity can have up to 30% of its assets in the U.S, but the weighting currently sits at 9.5%, as Sirdevan took profits recently in companies that had made a strong contribution to performance but had become richly valued. The cash position is now around 9%.

Among U.S. holdings, earlier this year Sirdevan sold  Echo Global Logistics Inc. (ECHO), which provides management services for the trucking and freight-forwarding industries. He also took profits in CBIZ Inc. (CBZ), a provider of business services including accounting and employee-benefits consulting, and in  Fluor Corp. (FLR), a multinational engineering and construction company.

Sirdevan added to the fund's holdings of Middleby Corp. (MIDD), a U.S.-based manufacturer of commercial cooking equipment, as well as Viking residential appliances.

On the Canadian side, Sirdevan redeployed some sale proceeds into a new position with the purchase of Uni-Select Inc. (UNS), a leader in the automotive aftermarket parts and industrial paint businesses. The fund also bought Winpak Ltd. (WPK), a Winnipeg-based manufacturer of packaging solutions for perishable foods, including plastic meat pouches and coffee creamers.

One of the fund's holdings, Pure Technologies Ltd., a Calgary-based developer of technologies for critical infrastructure such as water distribution systems, was taken over in a cash deal by New York-based  Xylem Inc. (XYL) at the end of 2017, a successful outcome for a portfolio holding. "Small-caps tend to be acquisition targets more frequently than large caps, which is one of the benefits of investing in the small-cap world," Sirdevan says.

Sirdevan has been opportunistic in taking advantage of market volatility to add to existing holdings when they're "on sale." For example, he's recently added to Maxar Technologies Ltd. (MAXR) (formerly MacDonald Dettwiler and Associates), an outer-space technology company,  Stericycle Inc. (SRCL), a U.S.-based world leader in collecting and disposing of medical and other types of waste, and Stantec Inc. (STN), an engineering, construction and design firm. "We love volatility," Sirdevan says. "It gives us the opportunity to buy companies we like."

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