The Canadian Investor - Digital Realty, Enghouse and BEP stock split

Episode Date: August 3, 2020

We start the episode talking about Brookfield Renewable Partners recent stock split through BEPC. Simon then talks about Digital Realty Trust and Data Reits. Braden wraps up the episode by doing a deep dive into Enghouse System Limited.We hope that you enjoy the episode!Tickers of stocks discussed : BEP, BEP-UN.TO, BEPC.TO, BEPC, ENGH.TO, DLR, EQIX, COR, AMT--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

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It has been a crazy week in earnings season. And for some investors who own BEP, Brookfield Renewable Energy Partners, very confused. I got tons of emails today. Why is the stock down 20%? It's not actually down 20%. Look at press releases. What happened today, Simon? Yeah, well, first of all, welcome back, everyone, to the Canadian Investor Podcast. Yeah, for BEP, it's actually, they announced it back in March so if you guys just search the press releases and you can also search BPC so Brookfield renewable partners corporation so essentially it's a mix of a couple of things you can look

also just to get an idea of what happened very similar to what BIP and BIPC did so what Brookfield is doing with these two entities is they want to make BEP and BIP more attractive to institutional investors. So the reason right now that institutional investors are a bit reluctant to invest in those two is because they're limited partnerships and there can be some tax implications if you don't hold them into a registered account like a TFSA or RRSP. So if you have them in a taxable account, it can be a bit of a pain to do taxes for that. So that is the goal behind that. So what they're doing is for each four units of BEP, I believe it's for holders, if I remember correctly, for owners of the shares as of July 27, 2020. Give it a week or two depending on your broker, but for owners at that

date, for each four shares of BEP, they will receive one share of BEPC. So what they did in that, it's basically a stock split. But what they did is the dividend OB, you'll receive the same dividend in terms of total amount of dollars when you combine both shares, but the dividend per share will be reduced a little bit. So that's why basically they're diluting in some way if you like, but it's splitting the stock. So that's why you saw that drop. The 20-25% makes all the sense in the world because it's a 4-1. So if you just do some quick math, it would be 20-25% depending how the market's reacting. So it's nothing to worry about. The thing behind this stock split is they had to do that to finalize the acquisition with Terraform Power. So if some of you are Terraform Power owners, in the next couple of weeks, you'll actually see

your shares of Terraform Power being converted to BPC shares traded on the US stock exchange for those because Terraform Power is listed over there. So yeah, in a nutshell, that's the whole reasoning behind it. Brookfield is always doing some of the most absurd corporate restructuring I've ever seen, but they do whatever it takes to make some of these acquisitions happen. Terraform Power has been a great renewable energy stock and now is part of the Brookfield names. So yeah, busy, busy week. Big tech getting grilled by lawmakers, CEOs of Facebook, Amazon, Google, Apple. I can't wait to watch some of these clips because last time they got grilled, watching some of these lawmakers navigate around tech is quite entertaining to say the least. In earnings week, just before

we move on to the topic of today, did you see anything that came on your mind, Simon, in terms of results coming out from some of these companies? You know, a lot of them coming out and saying, these companies, you know, a lot of them coming out and saying, okay, I think the worst is over. But it's really, really hard to tell. Not many CEOs giving guidance and the ones that are, you know, doing well through the pandemic are happy to even raise guidance. So it's a bit of a mixed bag. What are you seeing out of some of these results uh yeah for the most part it's uh obviously the results are quite for the most part impacted by the pandemics because q2 is when pretty much everything was shut down whereas q1 for the most part depending how they're obviously their financial year lined up but for the most part q1 was only partially impacted by the pandemic. So yeah, you're seeing businesses

that were really had a hard time through the Q2. And I mean, for the most part, I think it was expected. I always find it funny when companies are raising their guidance right now. If you're a CEO, I mean, why would you even risk it? Even if you're very confident? Why aren't you just, you know, just pull it all together or just keep it as is if you think you'll you'll meet and possibly expect it. I think it's a pretty bad move personally, right now to raise guidance when there's only downside in doing so. Companies are basically getting a free pass if they're withdrawing guidance or keeping it as is so that's probably my my take on it yeah it's a complete free pass on guidance uh you know i'm

not giving guidance this quarter oh okay that's fine that's that's that's completely fine um so i agree with you why even why even say it but again i mean I mean, a lot of these CEOs, execs know the business really well, they're seeing forecasts, they're seeing a potential bottom in sales due to the pandemic and the lockdowns, you know, I think a lot of them are realizing, even if cases come back, we're not going to be putting, you know, the whole country in lockdown again, hopefully. I don't know. Who's to say, right? I'm knocking on wood right now as I say that.

Let's move on to today's topic. We thought we'd do a little stock pitch for you guys. I love doing these. Last time I did one was Spotify. Go check out the chart. Not a big deal. Simon, what is your pick this week? So my pick this week is Digital Realty Trust. So I have mentioned this before. It is a data center

and I think it's really an amazing business. Lots of things going for it it so just to give you guys a little idea of what data center read does so it is a real estate investment trust so they're required to pay 90% of their earnings to get a tax break however some of the metrics we'll be using is from funds from operations and adjusted fund from operations so FFO and a FFO So before we get started I know I've mentioned this before but just if we have some new listeners or if you just forgot about it that's fine. So the FFO is basically you take the net income and you add depreciation and amortization back in. It is a non-gap measure. So what is a non-gap measure? So a gap measure is

generally accepted accounting principles. So non-gap are basically non-generally accepted accounting principle. You have to take non-gap measures sometimes with a grain of salt. However, for REITs,'re very very useful so those two metrics the reason we've talked about it before is the depreciation and amortization it doesn't really apply as much to to REITs because usually the building doesn't really decrease in value if anything oftentimes it will increase in value and the the amortization, it doesn't give you a good indicator in terms of the actual money coming in and out. AFFO is like funds from operation.

It's adjusted and basically it takes into account the maintenance required to keep those buildings running. So I find it even a bit better. So I'll be referring to those two measures when I'm talking about these. If you're thinking, oh man, I'll need to crush these numbers and do all the work myself, worry not. You can actually find that information pretty easily in most investor relation pages for REITs. easily in most investor relation pages for REITs. So if you look at the supplemental information for the quarterly releases, look for the Q4

release, the supplemental information of the Q4. That one will contain the full year information and also the quarterly information. So you can just look at those and then it'll give you a good idea. You'll have the actual FFO and AFFO metrics on there. So before I get started on DLR itself, Braden, did you have any questions or any comments on AFFO and AFFO? No, I'm good, man. Well-versed. I want to hear this pitch, though. I like this company, but I got some questions lined up for you. So I'm excited. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online

broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit Questrade.com for details. That is Questrade.com. Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades,

their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo-style education lessons that are completely free.

You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store, and I'll see you there. So what is a data center? So first of all, it provides physical space, so the actual building. So each piece of equipment that a company will want to use in the data center takes rack space. So basically, there's an

infrastructure cost for that so the data read center provides that it also will provide the power consumption but usually will be included in the price it provides data connectivity so data center has multiple internet connection for different types of bandwidths and and obviously they're distributed among the customers that are using some of that space. They'll also do cross-connection. So if you need to connect equipment which isn't in the same rack, the data center will need to run cables. So there might be a charge for that as well.

And they can offer labor and technical support, but companies can also provide their own. Obviously, there would be a charge for that as well. So that's basically what a data center reprovides. They won't actually put the servers in. So usually those will be the responsibilities of the actual tenant. So as you can imagine, it's a pretty solid kind of business just to begin with for that. So now let's look at DLR a bit more specifically. So the numbers are really good. I mean you can't first of all let's just think about it for a second. So data read I mean we're doing more and more stuff in the cloud, more data storage, everything you can think of pretty much has to do with data. So the tailwind are just amazing for this sector, whether you look at DLR, Equinix,

CoreSight Realty, and I know there's a few other ones that are listed, but the tailwinds are just huge. So the revenues and profitability. So the revenues went from $1.26 billion to $2.26 billion from 2014 to 2015. So that's 12.5% compound annual growth rate, so very solid. The funds from operation per share went from $5.04 in 2014 and $6.65 in 2019. So that's a 5.7 compound annual growth rate for FFO. Again, very solid as well. And the AFFO payout ratio was around 80% in 2014 and 2015.

But since then, it's been around 70%. And I think that's where their sweet spot is. And really, I mean, the dividend is well covered. As you can see with the 70% payout ratio, it might be a bit high if you compare it to other types of businesses, but because they have very stable cash flows, that's something that is totally acceptable, not an issue in my mind. The dividend went from 0.85 cents per share in 2015 and this year it is $1.12 per share so that's 5.7% compound annual growth rate which is pretty it's in line with the FFO increase so you can you can see that correlation between the two and that's

really important because you because if you grow your funds from operation at a certain rate, the dividend can oftentimes grow at a similar rate. Whereas if your funds from operation don't grow as quickly as your dividend, then that's where the payout ratio could be strained. So those are all really good things in my opinion for DLR. really good things in my opinion for DLR. Balance sheet looks solid. Management prides itself as having a good conservative approach in terms of capital allocation so they don't want to overextend themselves when they invest in growth opportunities. And you can really tell that by looking at the balance sheets over the past five years. The most recent one, they have $23 billion in assets, $3 billion of which is Goodwill and $12.4 billion in liabilities.

So those are fine ratios, very comparable to Equinix and Corsight Realty, two of its competitors. The asset to liability ratio has stayed very constant in the past five years. So that's a good thing. They're not, again, leveraging themselves too much. So that's something I always like to see. And the interest expense is well covered by FFO. It's around 4.5, 5x FFO. In terms of where their business is so they are fairly well diversified globally they have two percent of their data reads in Latin America obviously that's not high six percent in Asia Pacific twenty seven percent in Europe Middle East and Africa, and then 65% in North America. So definitely still more of

a presence in North America. And if I remember correctly in North America, I think it's only the US, but that's just going on memory. And in terms of its clients, I mean, you'll recognize a lot of names. So you have Oracle, you have IBM, Facebook, a lot of Fortune 550 software companies. And they're pretty well diversified in terms of clients. The biggest one in terms of percentage is IBM with 6.4%. So you have a lot of major companies in there. So very good diversification when it comes to client. So that's pretty much my overview

for uh for digital realty trusts um so brayden what kind of questions did you have for me one thing i did want to point out that i really love about this business is that they don't own the servers the servers are actually have to be purchased by the actual company, like their customer. So the servers have to be provided by their customer, and then they put it in their data center and then collect rent on it. That part of it seems like a really good, one of the better parts of the business model. good one of the better parts of the business model uh one thing i would like to comment on simon is i am glad you are invested in renewable energy as well to offset the outrageous footprint uh energy consumption wise that these data centers use uh over 400 megawatts of distributed generation inside of their uh their data centers which is huge like

here in ontario the big nuclear reactors are 800 megawatts so half a nuke right there definitely quite big one of my bigger questions for you and you mentioned them the big competitor and kind of the leader in this space by market cap is Equinix, if I'm pronouncing that right. It's so similar on like literally every metric other than just DLR is a little smaller. So I'm just wondering when you're looking at both of them, is there a reason that you like DLR more more would you be happy to own both and like kind of visa mastercard situation where i'm about to capitalize on this big secular growth trend of data centers and you know are just endless need for increasingly more data is dlr want something

that sticks out more to you than the rest of the peer group? Or would you be happy to own all of them? What's your thoughts on this process? Yeah, I mean, I don't think you can go wrong whether you choose DLR or Equinix. Like you said, the metrics are very similar. I think they have a slightly different approach in terms of the services they'll offer to their tenants. But again, I mean, I don't think you can go wrong if you pick one or the other. If you're looking a bit more for a higher yield, say you're retired, but you still want a play on data REITs and the tailwinds that they're actually facing right now. I mean, DLR might be a better idea just because it pays a slightly higher dividend

and you're looking to get the income. But if not, I mean, you can't go wrong if you actually purchase both or I would even personally go and do maybe a basket. So DLR, CoreSight Realty and Equinix. I like CoreSight because it's a smaller player in the space. It's a pure play in the US. Equinix I like because it's more diversified globally.

And I mean, obviously DLR and Equinix are more, they're a bit more in terms of financial resources. They have them more than CoreSight Realty, but CoreSight Realty might have a bit more growth because it's much smaller, right? So I don't think you could go wrong if you do a basket approach. Again, if you're looking into these, I would always recommend just dollar cost averaging if you want to start a position. But I mean, those are just what's not to like. They pay a dividend. There's huge tailwinds um they're financially they're

very stable and it's really steady as she goes so um yeah that kind of says it all no it certainly is steady as she goes uh that is definitely a stock chart that is up and to the right in a major way uh so it's been good to be a shareholder the other name i would mention that we talked before we started recording is american tower group ticker amt if you were to take that basket approach definitely pricey um in terms of price to afo but uh american tower is American Tower is potentially, you know, richly valued due to the 5G hype. But they're going to be delivering on 20% year over year dividend growth according to management. It's pretty hard for them to see that not come to fruition with the amount of data consumption and the amount of, uh, you know, that business model just improving as, as 5g rolls out. And like I said, are just insatiable thirst for data. Um, and that's only

going to increase when we start talking about the automated internet of things and self-driving cars. You know, it's just, it's an obvious secular trend back to our episode last last week well even this is it's just obvious it's going to happen yeah exactly and even like you were mentioning uh video games last week and even video games more and more developers are trying to get uh like video games on the cloud so people don't't need souped up PCs or machine to be able to play the game, they basically would play it, you know, through their internet connection, the game would be housed in the server. So there's, I mean, you can just take a few minutes, and you can probably think about, you know, 1520 different reasons why there's a crazy tailwinds for them.

why there's crazy tailwinds for them. For sure. As Charlie Munger says, fish where the fish are. And this is definitely a pond with lots of fish. All right. I like the pick, Simon. Golf clap from me.

It's about time that I do a formal pitch because how many times many times you know if I had one Shopify share for every time I mentioned EngHouse on this podcast well oof I'd be probably retired living on a beach somewhere so okay let's talk about EngHouse this is a smaller firm in the grand scheme of things, just a few billion in market cap. Been such, such a good performer in the last 12 months and beyond. So yeah, just go check out a stock chart for Enchouse and you'll see the market absolutely loves this thing. Before I get on the pitch, loves this thing. Before I get on the pitch, I will agree that the valuation multiples are definitely getting stretched. There's no argument about that. But I'm going to explain why the

market likes this thing so much. And we talked about secular trends last week. Well, this company has been aggressively investing in those secular trends pre-COVID. So the management team seems to have some sort of crystal ball and have been very, very prudent executors and managers of capital. So what Ench House does is it's a large, large portfolio of enterprise software, B2B mostly, companies. So it's a massive acquisition machine that buys small cash flowing and profitable software businesses with high recurring revenue and three of their main verticals. So the first and the largest vertical is their interactive division. So some of the names in here do video communications, Microsoft Teams integrations, telemedicine infrastructure, different APIs for businesses to improve communications in their organization call centers work for analytics the list goes on so tons and tons of smaller sas companies

inside of this so you're probably hearing some of those names and going oh they probably had a pretty decent quarter well you were right so before I get back to that portfolio, they also have a networks portfolio. So network operations, 5G cloud infrastructure, again, very similar to the secular trends we were just talking about with DLR. EngHouse has a small, in a small ways in that game as well. So that's one of the divisions. And then their transportation portfolio, transit, fleet management, public safety, e-ticketing. It's another one of their divisions. So the three of those. And inside of those three divisions,

those three portfolios is a basket and basket of small software firms that are essentially acquired, made part of the Ench House family, do integrations between them and try to find synergies between them where possible. But at the end of the day, they want to acquire these companies and let them continue to grow organically while Ench House, the parent company, goes after that acquisition growth. So you're seeing some organic growth, probably best in class in terms of organic growth compared to the competitors of software acquirers here in Canada. So also had to do this pick because you did an American one, here's a Canadian pick. So that's kind of what you're seeing is you're

seeing organic growth. Let those companies continue to operate and then take the cash flow, the profits that these companies are spinning off and go look for more acquisition targets. The acquisition targets for niche B2B software in these verticals is literally endless, like on a global perspective. Because on a global perspective, this is 2019 numbers. US was 30% of their business, Canada, only 3% of revenue, Europe, 18%, Scandinavia, 24%, Asia Pacific, 6%, UK, 19%. So this is a software firm acquisition strategy out of Markham, Ontario. But don't be fooled, they're doing almost all of their business outside of Canada, 97% of it outside of Canada. So this is one of those companies that is looking for global secular

trends, capitalizing on it, trying to pay a good or fair price for these software niche companies, and then continuing to rinse and repeat and boost cash flows. So some of the recent acquisitions is why I liked this company before, and I really like it now. And this is why you know i liked this company before and i really like it now and this is why the multiple expanded from like a 32 pe to upwards of 50 times earnings these days so the valuation is definitely quite quite high quite rich but that's because of some really, really strategic acquisitions. They made six acquisitions since the beginning of Q1 fiscal 19. And midway Q3 in fiscal 19, they acquired a company called video. And video basically is an API for companies when they're building out, uh, team software to easily integrate video communication. Um, this has been a huge, huge grower during the COVID

environment, of course. And it's been, uh, management's come out and said, this acquisition has been a huge driver for growth. And that's we delivered you know huge growth on revenue compared to q2 or q1 last year so i was reading this report and we've talked about how management is not comfortable going out and saying uh you know covid could be great for our business but But and shows basically was just like, look, the investments we've been making over the last year and a half happen to all be very, very good in this environment, to say the least, like telemedicine, video communication, and Microsoft Teams integrations. You know, some of those developments, Microsoft Teams seeing massive, massive boosts in

usage and honestly could put slack out of business the way slacks acting, you know, filing competition lawsuits in Europe. So it's it a company that seems to have some sort of crystal ball when it comes to these acquisitions. It's really, really hard to dislike some of the fundamentals, some of the profitability, the dividend growth. So what they do is take a step back again. They go for companies in the $55 to $50 million range in revenue. So they're getting them pretty early.

They're doing a takeover pretty early on some of these software companies. These are founders that are potentially looking for exits and can be replaced with a new CEO, potential partial cash out. So this, you know, Ench House as an acquisition machine is good for founders and is probably, they're probably liking how quickly and agile they're able to get some of these deals done. So it's probably,

it's great for both parties in this situation. So they're looking for geographic scale solutions that are really sticky and high barriers to entry for other competitors. Because with some of this small software, big tech with limitless amount of cash can go completely steal all the market share. But these are too small for them. So it's almost these small niche categories is the moat in a way and can still achieve global growth in that small niche. So it might not be a $100 billion opportunity, but it might be a $100 million, $500 million

opportunity for some of these companies. So that's been their bread and butter. To give you some of the metrics here, 10-year compound annual growth rate of 17.3%, 25% compound annual growth 10 years on earnings per share, and 18% on free cash flow. Give this balance sheet a look. No long-term debt. It is in lots of cash to make acquisitions coming through to the end of the year. They make an acquisition pretty much every quarter.

So it's really good to see gross margins 70%, of course, with software. Free cash margins of 20% on 10-year median. Really, really hard to like some of these fundamentals. You could roast me on this valuation getting stretched pretty richly, and I will not disagree with you. The dividend's growing at over 20% a year. For dividend growth investors, you know, US or Canada, this is a pick that is still small and not on a lot of big smart monies radar, you know, being less than 5 billion in market cap, a lot of these big, big names don't

even look at it. If you're a dividend growth investor with a long runway here, it's really, really hard to dislike an acquisition machine like Enchouse. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with

Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked.

And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking,

sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the App Store and I'll see you there. Oh, is it my turn to chime in? It's your turn, buddy. I have pretty much no more to say about this company yeah um other other than i own a a ton of it um so yeah well you make you make me want to buy it did that pitch work yeah if i sold you uh if i sold you i'm i mean it's

trading at nine times sales so i, it's which is actually not outrageous for SAS, if anything, it's cheap for SAS. The only thing that I'm going to, you know, almost counteract my my bull case here and say, and talk about the bearish case, is there's a couple things I don't love as a shareholder about it. There was one thing I really like being a shareholder about it is that it's made me a ton of money. But the thing I do not like is the investor relations page not only looks like it was developed in the 1940s for a software company is kind of questionable but it's this big confusing black box of companies um and they're not transparent whether that's on purpose or not

i don't know about sort of the the split between how some of these names are performing in these big basket of companies it's really a black box as an investor. You're putting a huge leap of faith in the management team, which is fine. It's impossible. Another name I love in this space is Roper Technologies, which is much, much bigger, like $40 billion on the US exchange. And again, it's really, really hard as an investor to be in Roper's scenario, be an expert in all 43 of their businesses, right? Or even a Berkshire shareholder, are you going to be an investor in over 70 private companies and 30-odd public companies. So you are, again, taking that instant diversification and leap of faith in the management team, for better or for worse. I don't love that.

I like the more simple businesses. But again, this company is in the right places. Seems like a bit of a crystal ball going into COVID. So sometimes you get lucky. It is what it is. Yeah. And so I was wondering, do they have a specific dividend policy or they kind of or like a ratio or a target to increase it year over year? Yeah, they're part of like's Dividend Growers Index. They've been raising it very consistently.

I'm looking at a 10-year statement here, and I can't see past 2010, but they have raised it every single year during all of those years. So back in the early 2010, 2011, they were growing the dividend at 34%. It's pretty... Oh, sir, I was looking at DLR. Even better. Last year, Enchaus raised the dividend 44% in 2019. 44%.

So there's only been two years on this 10-year statement that they didn't raise the dividend more than 20%, and those two times were 18 and 15. So extremely predictable dividend growth because of the model. They buy instantly profitable companies out there doing $5 million to $50 million in revenue, and it's just kind of like a piece of cake for them to keep raising earnings and keep raising EPS growth and dividend growth for the long term.

It's just, to me, it seems like easy money on the table. Yeah, and there's no risk of getting into bidding wars sometimes. I know they're not the only company that focuses on an acquiring strategy for smaller businesses and incorporate them. Isn't there a risk that maybe they'll start, you know, get competition with those businesses from Constellation Software, Ropart, you mentioned? Is that a risk or because they're much smaller, they can really dabble into the probably too small for even those companies? Yeah, it's a great question. I think there will be increased competition in terms of holding companies

that are looking to buy cash-flowing niche software. holding companies that are looking to buy cash flowing niche software it's definitely one of my favorite types of companies out there right now and that will that will increase right now their competitive advantage is their agility nimbleness and and size of being small um their global footprint right now as well, like I mentioned that geographical revenue base, their advantage right now seems to be that they're finding deals that no one's really even looking at. Again, there's so many acquisition targets out there. Constellation Software came out and said that they have over a thousand companies in their acquisition database that they would be serious buyers of. So that's a lot of companies that just Constellation's looking at is we would buy these companies

today, tomorrow, and then they can put that into like a bit of a ranking system. They can be really, really selective. So as much as there is going to be increased competition, I think in some of these deals, there's so many fish in the pond that it's going to take a long time if ever for these acquisition companies to catch up in terms of numbers of them versus deals out there that founders are looking for exits or partial exits, continue to run the company or go do something else. That's kind of up to them. And it's a win. It's so honestly, it's a win win for entrepreneurs and and house as well. So it's a good question, though. I do think right now, that's not a concern, given how many opportunities there are out there

no fair enough good answer no i mean i think you covered it pretty well uh for me it's still a matter a bit more valuation if there is a bit of a pullback i might uh end up starting a position but i've had it on my radar for probably the past six months because of you, Brayden. Well, I appreciate that. I'm humbled. The other thing that I'm just looking at metrics right now is that perennial acquisition companies typically have a declining return on invested capital, which makes sense. As they grow, the ROI on the base of companies, on those new acquisitions, just by nature as time goes on, you see these big acquisition companies,

their return on invested capital continues like clockwork to creep down, which is not a bad thing. use like clockwork to creep down, which is not a bad thing. But what I find really, really interesting about Enchouse is the consistent uptick in return on invested capital. Like their recent acquisitions over the last 10 years have been even better and better. So last year, 2019 return on invested capital of 33.53%, the previous year, 32, 26, 27, 22. And that's going backwards. You're seeing this really, really nice expansion on profitability metrics of return on equity and return on invested capital, which is very untypical for these acquisition machines. So I find that really interesting in terms of management seeming to have some secret sauce. Again, in the right places.

I wish they were more transparent at Enchaus. I'm calling you guys out. I would like as a shareholder more transparency on which companies are doing what and what just give me a list of the names not not just what they're doing um so yeah i think there's an opportunity for some increased transparency as a shareholder yeah no that was great. Did you have anything else to add overall? Or we'll call it an episode? Let's call it an episode, man. This was really fun. I think we should do pitches more often. I get so fired up doing a stock pitch. Yeah, so just to plug my service here is I pick a company or two every single month. Sometimes it's not a new company in the portfolio.

Sometimes it's an existing position. Every single month in my newsletter on stratosphereinvesting.com, it's a 14-day free trial. You can see exactly what I'm investing in, names like this, research that I'm doing, and you can find it all there. All right, guys, this has been fun. Simon, let's do this again. This is The Canadian Investor. We will see you guys next week. Take care. The Canadian Investor is not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions.

Thanks for listening to this episode of The Canadian Investor. To get a list of the top Canadian dividend stocks right now and other valuable investing resources, go to GetStockMarket.com.