KeyStone’s Stock Talk Show, Episode 245. 

It’s great to be back this week. We kick off the show with a look at last weeks’ pole and Brett will take a quick look at Thematic investing. – essentially a top down approach which means taking into account large macro-driven qualities whether its GDP, interest rates, sector specifics or in this case specific trends. I hit the viewer mailbag to answer a question on Tecsys Inc. (TCS:TSX), which provides supply chain solutions to the healthcare and complex distribution verticals. The viewer points out the long-term revenue growth but lack of share price movement over the last 3-years and asks if it is an opportunity. Aaron answers a viewer question on BQE Water Inc. (BQE:TSX-V), a water treatment company specializing in providing innovative wastewater treatment solutions to the global mining industry. A micro-cap that is profitable and has a strong 5-year share price performance – the viewer asks if it can continue. Last and certainly least, Brennan put together an investment profile on Bill Ackman – the  American billionaire hedge fund manager who is the founder and chief executive officer of Pershing Square Capital Management, a hedge fund management company.

Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and the killer B’s, Brett and Brennan.

Thematic Investing


Historic themes

From the Visual capitalist, they broke down some themes by decades.

  • 1950s European stocks
  • 1960s the US Nifty 50
  • 1970s Commodities Gold and Oil
  • 1980s Japan
  • 1990s the Nasdaq
  • 2000s BRICS and Oil
  • 2010s FAANG

2) What is thematic investing?

Thematic investing is a top down approach which means taking into account large macro-driven qualities whether its GDP, interest rates, sector specifics or in this case specific trends.

The difference between just a standard sector or industry investment compared to thematic investing is thematic investing normally has a story around it. So, from the previous chart, the 1950s story was the rebuilding of Europe after the Second World War. Or more recently one not on the chart in the late 2010s the legalization of Marijuana where investors piled into cannabis companies.

As it is a story you’ll see news stories covering it generally within and outside of the investing community. You know it’s an investing theme once your taxi driver asks you about it.

And of course, as themes permeate investors and the general public the investing method is similar to momentum investing. Where price appreciation leads to more price appreciation and price depreciation leads to more price depreciation. This creates high volatility.


Why would someone invest thematically?

The biggest reason is that it is an easy way to invest. I have an idea of whether it be Japan is going to be strong or the future is in space which is effectively the end of research for most retail investors. And that would be compared to the fundamental bottom-up investing style we do where we comb through individual company filings which is significant work and a lot of dead-ends.

Then next you can invest in a fund most of the time these days an ETF which aligns with your view. ETFs are generally liquid but can vary, you can look at the bid-ask spread to give you an idea of how liquid an individual ETF actually is. For retail investors ETFs are generally liquid enough to manage quick inflows and outflows of capital but the more capital you have the more slippage will occur.

As you are isolating a trend the investment may provide diversification benefits to a broader portfolio, I’ll get into why that isn’t always the case in a minute.


What are the issues?

Your idea of a trend may not be able to be invested in. What I mean by this is there is not always public companies that align with your views. Further, most people who are doing a thematic method are using ETFs or perhaps a mutual fund in recent times. These funds are generally limited by their fund size. So, if you have a billion-dollar fund and a small-cap company of let’s say $20 million fits perfectly in the theme of the fund you may only be able to take a $1 million position if that which would be 0.1% of the total portfolio. Whereas an individual investor who is looking into companies specifically would be able to invest in smaller companies. A result of this is the fund may stray from the actual theme as it grows in assets under management as larger companies in which it can invest do not match the theme or only a portion of the company’s operations do.

As well since you are using funds, you will have management fees. Management fees will tend to be higher the more specific a theme is as the investor base is smaller. This also plays into making some ideas non-investable or at least less-investable as early identification of a future theme may not have an ETF but if it does it will likely have a high fee creating a drag on your returns.

Like I said before thematic investing relies on momentum. Most people will focus on the upside when a new theme appears but this relies on more people accepting the idea and investing into it therefore momentum investing. As a result of this momentum, you end up with absurd valuations with analysts of these companies moving away from price to cash flow or PE to price to sales or even stuff like page views during the dot-com bubble.

Last but not least, these funds may not be as diversifying as you the various asset managers running thematic funds want you to think they are. You generally have two points of diversification internally within a fund and in the context of your portfolio. So within the fund, some asset managers like to say they are diversified as they invest in dozens or hundreds of stocks but if it is a thematic fund properly built to the theme the underlying stocks should have high correlations in other words would not be diversified even when lowering the idiosyncratic risks of individual companies. Simply put a thematic fund is meant to be concentrated which inherently is not diversified.

Second in the context of diversifying your overall portfolio. Your portfolio may have some diversification effects but heavily depends on the theme. If you were investing in let’s say the Japanese stocks in the 1980s as a Canadian it would provide benefits. But if you were investing in the Nasdaq as an American in the 1990s it would be less diversifying as it would likely have a higher correlation and higher beta with the rest of your portfolio.  My point is even though fund managers will tote the diversification from investing in a large number of stocks it’s not cut and dry.


Lastly, can you incorporate thematic investing into your portfolio?

There are a couple of methods over just investing in funds. A hybrid approach where you identify a theme but then go bottom-up finding strong companies within the theme with a good valuation. This allows you to cut out poor performers and overpriced companies within a fund while still having exposure to your desired theme.

Second, look past internally within a theme and look to adjacent industries and companies for what will benefit from the theme as well. This can allow for the upside of a trend but lowers the downside if your adjacent company is not solely powered by a theme. As well, these companies tend to be priced better as pure thematic investors will overlook them.

And I’m going to wrap up my monologue here as I know Ryan has a company in his mind fitting this concept of adjacent investing specifically to the electrification theme.

Tecsys Inc. (TCS:TSX)

Stock Price$38.25
Market Cap$562.97 M


What does Tecsys do?

Based in Montreal, QC, the company provides supply chain solutions to the healthcare and complex distribution verticals. The company’s software covers warehouse management, distribution and transportation management, supply management at point of use, distributed order management along with financial management and analytics. Primarily sells its solution on a SaaS basis and has over 1,000 customers in 15 countries.

From $45.1 million in 2014 to $168.5 million over the past 12 months.

Cash flow from operations not as strong.

While the company continually produces positive cash flow, it is lumpy from year to year and there is not a significant growth trend over the last 10 years. Profitability is similar. 

Q3 2023 Highlights:

  • Total revenue excluding hardware revenue was $36.2 million, 11% higher than $32.5 million reported for Q3 last year, while total revenue rose 13% to reach a record $43.8 million.
  • Gross margin was 45%, compared to 44% for the same period of fiscal 2023.
  • Net profit was $0.8 million or $0.05 per share on a fully diluted basis in Q3 fiscal 2024, compared to net profit of $0.9 million or $0.06 per share for the same period in fiscal 2023.
  • Adjusted EBITDA was $2.6 million compared to $2.8 million reported in Q3 last year.

Q3 2023 Additional Notes.

  • Good balance sheet: ~$33.2 million cash and cash equivalents and no debt.
  • SaaS revenue increased by 48% to $14.2 million, up from $9.5 million in Q3 2023. — benefited from a 3% FX tailwind and a one-time revenue recognition of $700k related to the completion of a product performance obligation.)
  • Annual Recurring Revenue (ARR) at January 31, 2024, was up 16% to $87.2 million compared to $75.4 million at January 31, 2023.
  • Note: SaaS subscription bookings (measured on an ARR basis) decreased by 17% to $4.9 million, compared to $5.8 million in the third quarter of fiscal 2023. (


Valuations are at a premium:

EV/Revenue (FY 2024e): 3.1x.

EV/EBITDA (FY 2024e): 53.8x

EV/EBITDA (TTM): 65.95x

PE (FY 2024e): ~290x


Alongside the quarter, Tecsys announced a February restructuring, which reduced its workforce by ~4%, which equates to $4.6 million in annual savings (it will book roughly $2.3 M in severance in Q4).

The company appears well positioned for continued long-term revenue growth, as it capitalizes on its leading end-to-end healthcare products. There should be operating leverage as the SaaS mix increases, SaaS margins grow and investments moderate relative to growth, but this will take time.

It is a good company, but the valuations are high at present and limit upside. It is priced to perfection to a degree based on forward numbers. When asked on the company for the past 3 years, we have answered with the same take – good business, good balance sheet, the SaaS part of business is becoming more significant, but the price we are being asked to pay is too rich. Over the past 3-years the stock is basically flat and I am not surprised. MONITOR at present.

The software space in Canada is limited and we would potentially like to own a name like Tecsys, but not at any price. Particularly when the stock trades at over 50 times forward EV/EBITDA and we were able to buy a Canadian software small-cap with higher growth at 10-11 times forward free cash flow this past November – on a comparable basis, it was far superior value. The stock is up 89% since then and we are happy to have recommended that business, over Tecsys.

Bill Ackman

Slide 1

I recently watched Bill Ackman on Lex Fridman’s podcast and given how similar his investment philosophy is to KeyStone’s and how much I just really enjoyed the podcast, I thought that I would cover him as an investor spotlight.

So to give a quick rundown on his life:

  • Bill was born in 1966 on New York and Graduated from Harvard in 1988 with a Social Studies degree and in 1992 he received a Master of Business Administration.
  • He is a “Value Investor” and Activist Investor, with a strong influence from Warren Buffett’s investment style with a focus on simple, predictable businesses with strong cash flow. And he references Benjamin Graham’s “Intelligent Investor” as being formative in his career in teaching him the difference between Price vs Value.
  • In 1992 Bill founded his first fund, the Gotham Partners, with fellow Harvard Graduate David Berkowitz. 
    • After early success, he shut down the fund in 2001 due to some ill-timed bets, lack of diversification and a dangerous concentration in illiquid investments that could not easily be sold when investors wanted their money back.
  • This led him to eventually start Pershing Square in 2004, which became a top global hedge fund known for its activist investment approach and substantial annualized returns. The fund began with approximately $54 million in initial capital and generated a 17.1% annualized return between 2003 and 2021, where he now has $18 billion in Assets Under Management.

Slide 2

Since Pershing’s inception in 2004 his PSLP fund has returned a cumulative net return of 1,979% while the S&P’s cumulative return over the same period was 535%.

So lets take a look at some of his investing successes, as well as some of his major losses.

Slide 3

General Growth Properties Inc. was the second largest commercial shopping mall REIT in the United States that was facing difficulties in 2008 due to the global financial crisis. Up until the financial crisis, Bill stated that many people saw malls as being “undisruptable”. But the CFO of General Growth was very aggressive in the way that he borrowed short term money which led the stock from $63 per share to $0.34 cents. So while General’s debt was worrisome, the fundamental drivers of malls are occupancy and net operating income, and from 2008-to-2009 Bill said that these fundamentals were actually improving which led him to buy 25% of General Growth’s shares. Bill was able to get on the board of General, restructured the business and the stock climbed back to $31 per share. And once General Growth recovered, the company eventually spun off into two new companies: The Howard Hughes Corporation (HHH:NYSE) in 2010 and Rouse Properties in 2012, with Pershing Square still holding 38% of Howard Hughes Holdings.

Bill first invested in Canadian Pacific (CP:TSX) Railway in 2011 when the stock was trading around $69 and his investment thesis was based on CP underperforming Canadian National Railway (CNR:TSX). Bill was very critical in saying that CP was the worst run railway in North America and said management would blame any underperformance on the weather… which Bill called BS on. So he saw it as a good company but it was poorly managed which led him to take 12% stake in 2011. Bill tried to get Hunter Harrison, a veteran railway CEO to meet with the board to potentially run the company, but given the board would not meet with Hunter Harrison, this led to a Proxy Contest and the then current management and BOD was voted out. Bill was forced to sell his initial investment in 2016 when he had a run-on Capital after a few poor investment decisions to raise liquidity. But in 2022 Bill re-entered into a position in the stock and says that if he held onto his original position, the position would have returned approximately 11x his initial investment.

Slide 4

Now let’s quickly at just a couple of his “stinker” investments.

In 2012 Bill took a short position on Herbalife (HLF:NYSE) that was valued at ~$1 billion.  Ackman believed that Herbalife’s business model was an illegal pyramid scheme which would target minority communities who lack business acumen. Although Bill was able to successfully gain the attention of the FTC which led to Herbalife paying a $200M fine and was forced to reform some of its business practices, in 2018 he threw in the towel on the short position for a loss of approximately $1 Billion. I could also elaborate a little further on Herbalife in that Carl Icahn tried to short squeeze Ackman’s position on Herbalife, leading them to have their famous exchange on CNBC where both of them slandered each other live on air.

Quebec Based Valeant Pharmaceuticals which is Bill’s largest investment loss at $4 Billion. He notes on the podcast with Lex that he had avoided pharmaceutical companies due to their complexity but decided to make his first passive investment in 2015 because another “activist investor” was governing Valeant’s board. However, the company made a series of decisions that were disastrous including drug-pricing investigations and improper accounting allegations which led the company to be subpoenaed by U.S. prosecutors. Bill doubled down on his investment, backing the company, but in March 2017, Bill sold its final stake in Valeant.

Slide 5

To finish things off here, just quickly looking at some of Pershing’s other holdings, Bill has voiced that one of his most successful industries to invest in has been food/beverage industry, currently holding a position in Restaurant Brands International (QSR:TSX) and Chipotle (CMG:NYSE). And he says the reason for his success in the space has been due to finding businesses that have good systems that can create efficiency and replication for growth. For example, we could relate this to The Boyd Group (BYD:TSX), as one of the reasons that Boyd Group was so successful in growing its stock price from around $2.00 to above $300 today is because of the implementation of systems. Acquiring mom and pop auto collision shops and introducing Boyds systems into the businesses to create efficiencies.

Another name which he owns is Alphabet (GOOGL:NASDAQ) which he began to invest in when people’s concerns were misplaced over the company’s AI positioning. With the introduction of ChatGPT, the market decided that Alphabet was falling behind in AI… when in fact, Google led the world as the dominant AI player up until this point. And according to Bill, Alphabet likely held back on introducing its own ChatGPT to the market due to the potential scrutiny that regulators would place on Alphabet. But given OpenAI was a startup, they received much less scrutiny. As such, given its valuation of around 20x earnings, he declared it was the most attractive of the magnificent 7.

Looking back at both his gains and losses, I will leave you with one quote from Bill “We try to find very robust, stable businesses which are only very modestly levered and as a result we don’t need to think particularly ‘top down.’ We don’t need to think about exactly where interest rates are going to be for us to do well.”


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