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Investor 500 2014: Top 3 stock picks from Middlefield Group’s Robert Lauzon

“We've got to make sure they view that dividend as sacred”

Robert Lauzon with Labrador Iron Ore Royalty Corp truck

Middlefield Group managing director and deputy chief investment officer Robert Lauzon looks for companies where dividends are “sacred,” like Labrador Iron Ore Royalty Corp. (Chris Sattlegger; Paul Daly/Canadian Press)

For Middlefield Group managing director and deputy chief investment officer Rob Lauzon, sizing up management is a big part of finding the best companies. “They’re your stewards of capital,” says the Calgary-based manager, whose style skews toward income and wealth preservation. “It’s important to have sat down, met with and have good relationships with all the management teams that we invest in.” And it’s essential when looking for income-paying investments. “They have a bit of a handcuff on them if they’re paying a dividend, so we’ve got to make sure they view that dividend as sacred.”

Typically Lauzon looks for companies that are increasing their dividends and have growing cash-flow-per-share metrics. On top of that, he wants to see executives that have a large chunk of their net worth tied up in the company. “Then they’re making decisions that are aligned with ours,” he explains. Lauzon’s Middlefield Income Plus Class Series A fund won a Lipper Award last year for the best-performing Canadian equity balanced fund over a 10-year period.

Robert Lauzon’s Picks

Chartwell REIT

Chart showing trailing 12-month stock performance of Chartwell REIT

P/E: 78.4
Yield: 5.3%
1-yr total return: 4.7%

Lauzon has good reason to feel confident in Chartwell REIT, which runs retirement homes across Canada. “My grandma is actually in one of them, so I know first-hand how they operate,” he says. The Mississauga-based company combines a nice income with organic growth from modest rent increases. Improving occupancy rates have allowed Chartwell to cut back on incentives designed to lure in new customers. With an aging population, Lauzon sees the company as a safe demographic play. And right now, the stock is looking cheap. “Whenever we find a REIT that’s trading below its net asset value, over time that’s been a good time to buy,” he says.

Labrador Iron Ore Royalty Corp.

Chart showing trailing 12-month stock performance for Labrador Iron Ore Royalty Corp.

P/E: 13.1
Yield: 3.3%
1-yr total return: 3.7%

Mining tends to be a risky business, but Labrador Iron Ore isn’t really a miner. It collects royalties from Rio Tinto, which operates the mine. “We find this has a very strong risk/reward characteristic to it,” says Lauzon. While the company gets to participate in any pricing upsides, it doesn’t come with a lot of the operational risk inherent in most miners. The regular royalties allow Labrador Iron Ore to typically pay out a special dividend at the end of each year, alongside its regular quarterly dividend. Lauzon also thinks the stock, which currently trades at around $31, is worth an even $40, giving it a 20% upside.

Trilogy Energy

Chart showing trailing 12-month stock performance of Trilogy Energy

P/E: 290.1
Yield: 1.4%
1-yr total return: 1.2%

The Duvernay formation in Alberta has been touted as one of the next big things in North American shale development. Lauzon says the best way to get a piece of it is through Trilogy Energy, which has substantial landholdings in the area. While energy giants like Encana and Shell are also active there, their exposure to the region is small compared to their overall size. Early drill results from some of Trilogy’s competitors will be coming out in 2014, something that Lauzon expects to move the stock higher. “We don’t think it’s a consensus call that the Duvernay will work out exceptionally, but we’re of the view that it’s better than what the market has priced in.”