Mark Rosen tries to peer behind the bookkeeping to discern companies with untapped investment potential, writes John Heinzl, reporter and columnist for Globe Investor.
Mark Rosen says his firm, Accountability Research Corp. (ARC), brings "a level of sanity" to the investment research business.
Launched a decade ago by Rosen and his father, forensic accountant Al Rosen, ARC provides no consulting, investment banking. or underwriting services to companies. Nor does it accept fees from companies in exchange for writing research reports about them.
"There is no...conflict of interest, so there is never any period where our recommendation is influenced," he said.
"The other huge area where we're different from the other analysts is our accounting expertise. We're the only firm in North America that is partnered with an active forensic practice."
ARC says its accounting expertise can help it spot problems before they erupt. But it's also useful for identifying investment opportunities that may be obscured by complex or deficient accounting. "We're looking not only for the accounting blowups, but also for everyday accounting impacts on valuations and target prices," he said.
Here are four stocks with above-average yields that ARC currently rates a "buy."
Fortis (Toronto: FTS)
Yield: 3.6%
Today's price: $33.16
Target price: $37
With about 90% of its profits coming from its regulated utilities, Fortis provides "excellent earnings stability," ARC says. But that stability doesn't come at the expense of growth.
Fortis is in the midst of an aggressive five-year capital spending program that will see it invest $5.5 billion through 2016, with about 65% of the money going to electric utilities, 21% to gas utilities, and 14% to non-regulated operations.
As Fortis's earnings march higher, ARC estimates that the company will raise its dividend by about 5% in each of 2012 and 2013, continuing a pattern of regular annual increases.
The stock trades at a similar valuation to other Canadian utilities, but ARC says the company deserves to command a premium because of its solid growth prospects and above-average yield.
Granite Real Estate (Toronto: GRT)
Yield: 5.6%
Today's price: $35.52
Target price: $41
Formerly MI Developments, Granite used to be the real-estate arm of auto-parts giant Magna International (MGA). The horse racing tracks are gone and Frank Stronach is no longer involved, but Magna still accounts for about 97% of Granite's rental revenue.
While such heavy tenant concentration is a risk, ARC says Granite's plans to convert to a real estate investment trust in 2013 will reduce annual corporate taxes by an estimated $7 million—or about 40% compared to estimated 2012 levels.
What's more, plans to leverage the balance sheet and diversify its tenant base through acquisitions will "generate more torque for shareholder returns," ARC said in a note.
Mullen Group (Toronto: MTL)
Yield: 4.3%
Today's price: $23.36
Target price: $23.50
Mullen operates in two distinct segments—oilfield services and trucking/logistics—and has grown aggressively through acquisitions, roughly quadrupling revenues in the ten years ended 2011.
A former income trust, the company chopped its distribution when it converted to a corporation in 2009. But it has since doubled the dividend to $1 annually, for a yield of 4.3%.
Despite a slowdown in gas drilling activity in Western Canada, the dividend appears safe. "Relatively stable free cash flows within the oil services segment and improving fundamentals for the trucking segment will allow the company to maintain its current dividend," ARC said in a note.
Thomson Reuters (TRI)
Yield: 4.6%
Today's price: $27.64
Target price: $32
Thomson Reuters, a global information powerhouse that serves the financial, law, and accounting industries, among others, has not given investors much to cheer about. But with the stock down about one-third from its 2011 high and languishing near the low end of its historical valuation range, ARC thinks it's worth a look.
Even as its core financial products and services unit has been hampered by the sluggish economy, the company—which, like The Globe and Mail, is controlled by Woodbridge Co. Ltd.—generates strong free cash flow, has an enticing 4.6% yield, and has been raising its dividend annually. So investors get paid to wait for Thomson Reuters' flagship business—and the stock—to rebound.
