Finding Value in Canadian Growth

Bryan Brown - Jun 23, 2023
In an economic downturn, opportunities for long-term value can become increasingly scarce. Uncover the shared characteristics of stocks that can weather the storm.

My career began within the financial services group at Ernst & Young and while three years of rigid audit tasks left little room for creativity, they provided a sound foundation in financial statement analysis and, given my client focus, an introduction to the capital markets. After obtaining my chartered accountant (CA) designation, I joined Macquarie Capital Markets as an associate working in equity research and built a solid base in fundamental stock analysis. My experience then led me to Sentry Investments, working as an analyst, to research North American equities through a long-term lens. My preference for growth-oriented stocks developed naturally since earnings, or more specifically, free cash flow, is what determines long-term value. As Peter Lynch said in his classic book One Up on Wall Street, "If growth in earnings is what enriches a company, then what's the sense of wasting time on sluggards?" I share the same view and have focused my time on growth since becoming a portfolio manager in 2018.

Assessing Future Growth

To put it briefly, our Canadian growth strategy is to invest in industry leaders in earnings and free cash flow growth, prioritizing companies with expected growth that compares favourably to the past. It is important to highlight that we view growth as industry agnostic. Within the Canadian Equity Growth Pool, a few stocks that reflect our strategy are below. 

  • Element Fleet Management (EFN CN) is the largest company in the North American fleet leasing industry with attractive attributes that include predominantly recurring revenue, double-digit annual free cash flow per share growth and high barriers to entry in the form of scale and "sticky" clients. In recent years, organic growth has improved steadily to a range of 6-8%, from 4-6% in 2020, which has been a key driver of cash flow and an attractive stock price.

  • GFL Environmental (GFL CN) is the fourth-largest waste management company in North America. The company went public in March 2020, providing recession resilience and pricing power. GFL is a highly acquisitive business which planned to double its size over five to six years but accomplished the goal in under three. Moreover, in the medium term, management has a plan to again double its free cash flow by 2025, which is likely to continue to propel share price appreciation.

  • CGI (GIB/A CN) is an IT services firm that provides systems integration, consulting and outsourcing. The company benefits from deep relationships with clients that increasingly utilize CGI's end-to-end services to digitize their businesses. CGI has reiterated its aspirations of achieving double-digit annual EPS growth and doubling its size in five to seven years via organic and inorganic investments ("build-and-buy model"), which is likely to continue the compounding of capital.

Areas of Interest

The appeal of the abovementioned companies is heightened in the current environment of slowing economic growth as the business cycle moderates and growth becomes scarce. As such, opportunities lie in businesses that have secular growth tailwinds, along with companies that excel at capital allocation to enhance free cash flow. In terms of secular growth, Information Technology presents many opportunities under the umbrella of digitization, which includes AI/ML, in companies such as CGI, along with Open Text (OTEX CN) and Kinaxis (KXS CN). On capital allocation, in addition to GFL within Industrials, other astute acquirers include WSP Global (WSP CN) and Boyd Group Services (BYD CN).

To round out our investment criteria, in addition to (i) above average free cash flow growth and (ii) strong capital allocation, other parameters governing the Canadian Equity Growth Pool include (iii) returns on invested capital that are high or have the potential to rise, (iv) low leverage, (v) margin of safety based on projected cash flow, and (vi) sustainable competitive advantages in industries with high barriers to entry. Identifying competitive advantages is where the bulk of our time is spent, allowing long-term investments to be made in companies that can effectively compound capital, which rewards us as shareholders.


Industry leaders in earnings, and especially free cash flow growth, have long-term investment value. In the Canadian Equity Growth sector, we seek out companies that have secular growth tailwinds, strong capital allocation, and low leverage, within an industry that has high barriers to entry. Stocks in our portfolio with these key factors, such as Element Fleet Management, GFL Environmental, and CGI, have a distinct advantage in weathering the current cycle of slowing economic growth.