The Globe and Mail - 06.03.2020

B8 O THEGLOBEANDMAIL| FRIDAY,MARCH6,2020

GLOBEINVESTOR

| REPORTONBUSINESS

D

uring the extreme market
volatility experienced in
recent weeks, this consum-
er staples stock has provided in-
vestors with a degree of downside
protection. Last week, when the
S&PàTSX Composite Index
plunged 9 per cent, the share price
ofJamieson Wellness Inc.de-
clined 4 per cent. On Thursday,
while the index dropped 1.3 per
cent, this stock held its ground,
rising 2.4 per cent.
In addition to its defensive
characteristics, the stock has oth-
er attractive attributes. The com-
pany is an industry leader. In Can-
ada, Jamieson is the leading brand
in the VMS (vitamins, minerals
and nutrition supplements) mar-
ket. Jamieson Wellness has report-
ed steady revenue growth and ris-
ing profitability. Revenue in-
creased to $345-million in 2019
from $248-million in 2016, while
the adjusted EBITDA margin ex-
panded to 22 per cent from 19 per
cent during this period. (EBITDA
stands for earnings before inter-
est, taxes, depreciation and amor-
tization.)
The stock has delivered solid
gains to its investors with its share
price rising approximately 79 per
cent since its initial public offer-
ing in mid-2017. Furthermore,
management is committed to re-
turning capital to its sharehol-
ders, targeting dividend increases
that are in line with the compa-
ny’s annual earnings growth. In
addition, the stock’s visibility is
increasing with the market capi-
talization recently crossing above
the $1-billion mark, and the com-
pany was added to the S&PàTSX
Composite in December.
The Globe and Mail spoke with
the president and chief executive
Mark Hornick, who addressed CO-
VID-19 and discussed manage-
ment’s strategic objectives.

Whatactionshasmanagement
takeninresponsetothecoro-
navirus?

We trained all of our employees in
January on coronavirus and pre-
cautions for a safe workplace.
As well, we made some significant
restrictions on business travel in
order to protect them and im-
posed a quarantine program
whereby if you were coming back
from vacation from a high-risk
country, you would work from
home for two weeks before

returning back to work.

Whatisthepotentialimpacton

yourcompanyfromasupplychain

perspective?

In January, when it became clear

that there was a high risk that the

corononavirus would become a

global pandemic, we focused on

three key issues. One, to make

sure that our employees are safe.

Second, we addressed our ability

to supply the market with our

products. In our case, there’s a

third dynamic – when you get

global health concerns arising,

consumers tend to pay a lot more

attention to preventative mea-

sures around their health. Supply

side, we forecast out our anticipat-

ed demand and secured enough

inventory to be able to have a

good line of sight on increased

production requirements into

[the third-quarter]. The inbound

requirements of raw materials

support our business objectives

for 2020 as we see the situation

right now.

Ontherecentearningscall,you

highlightedthreepillarsofgrowth.

Toexpandyourbrand,yourcustom-

erbaseandyourfootprint.Where

haveyouidentifiedopportunitiesto

expandyourbrand?

Our innovation pipeline spans all

the categories of product that we

currently compete in, plus poten-

tially other adjacent categories of

health and wellness that are

closely related to vitamins. We

typically launch in the combined

portfolio about 40 to 50 new prod-

ucts a year. Less than 30 per cent of

Canadians take a multivitamin,

the same for vitamin DÝ probiotics

is around 20 per cent and Omega

is also below 25 per cent. Det,

when you look at the nutritional

composition of what consumers

in Canada are eating, research

would say that around 60 per cent

of people do not get enough nutri-

ents from food alone. Over time,

as consumers build their knowl-

edge of our categories, the usage

of them increases. So there’s a lot

of upside in organically growing

the penetration of the different

categories of vitamins which we

market to consumers in Canada.

Youareindrugstores,retailers,

dollarstores,onlineonAmazonand

insportstores.Aretheresales

channelsthatyouhavenotyet

penetrated?

We don’t have a large presence in

gas and convenience yet, which is

definitely an opportunity. We

think we have a long runway to

grow e-commerce, and there are a

lot of our retail partners who have

formats where they haven’t been

selling vitamins in the past. For

example, if you go to a Metro gro-

cery store in Quebec, a lot of those

stores don’t yet sell vitamins. That

provides new opportunities to

build distribution.

Yourproductsareinmorethan40

countries.Whereareyoufocusing

yournear-terminternationalexpan-

sionefforts?

A couple of things about China

make it extremely interesting to

us. Chinese consumers in general

are very favourable toward the

brand. We have 1.5 million Chi-

nese Canadians living here who

may have some experience with

our brand and can serve some-

what as ambassadors to Chinese

in mainland China. Jamieson ac-

tually has meaning in Mandarin –

it means “healthy beauty.” In 2017,

China opened up approximately

95 per cent of the retail market

that was closed to foreign brands.

We embarked on a campaign to

gain licences by working closely

with China FDA. As of today, we

have more than 20 licensed prod-

ucts in China, which is significant-

ly more than any other foreign

brand that we compete with.

Those dynamics [make] China by

far our No. 1 incremental expan-

sion opportunity.

As for the U.S., we looked at it in

the past as something that had a

much higher investment [re-

quirement] and much higher risk

given that our brand wasn’t

known there. However, the rapid

growth of e-commerce changed

our perspective on that. Weeks

ago, we launched products in the

United States on Amazon with the

view to assess our potential for

success in the very large market.

Withyourexpansioninitiatives,do

youhaveadequatemanufacturing

capacity?Youhavethreemanu-

facturingplantsinCanada,twoin

Windsor,Ont.,andoneinToronto.

Whatisthecapacityutilization?

We are running at approximately

70 per cent of capacity right now

with some initiatives in place to

allow us to increase capacity. We

want to be able to put in enough

capacity whereby on a stand-

alone basis we can achieve our

2020 to 2023 growth objectives

and have a very sizable amount of

additional potential capacity we

can tap into in order to make sure

that if the upside in China or the

U.S. materialized quicker than an-

ticipated, we can capture that op-

portunity within our current asset

base.

Lastly,isacquisitiongrowtha

priorityfor2020ordoyouhave

enoughonyourplate?

The way we look at it now, we have

a very exciting lineup of organic

growth opportunities on our

plate for 2020, so acquisitions will

likely be more of our agenda from

2021. This year we are really fo-
      cused on continuing to grow in
      Canada, maximize our opportu-
      nity in China, and kick off a good
      start to understanding what our
      possibilities are in the U.S.

Thisinterviewhasbeenedited

andcondensed.Anextended

versionisavailableon

tgam.ca/inside-the-market.

JAMIESONWELLNESS(JWEL)

CLOSE:$28.19,UP66¢

Astockthatoffersthebestofbothworlds

JamiesonWellnesshasprovidedprotection

andsteadygrowthsinceitsIPOin2017.CEO

MarkHornickdiscussestheimpactofCOVID-19

onthecompanyanditsobjectivesmovingforward

JENNIFERDOWTY

JamiesonWellnessCEOMarkHornick,seeninaTorontopharmacyonFeb.25,saysthecompanyhastaken

‘precautionsforasafeworkplace’amidtheCOVID-19outbreak.AARONVINCENTELKAIM/THEGLOBEANDMAIL

Thestock’svisibility

isincreasingwiththe

marketcapitalization

recentlycrossing

abovethe$1-billion

mark,andthe

companywasadded

totheS&P/TSX

Compositein

December.

INSIDETHEMARKET

CanadianMomentumPortfolio

COMPANY TICKER PRICE

12M TOTAL

RETURN

AuriniaPharma. AUP-T $24.41 173.96%

BallardPower BLDP-T $12.06 155.51%

Shopify SHOP-T $623.22 150.01%

EldoradoGold ELD-T $11.65 104.03%

NovaGoldRes. NG-T $10.65 104.02%

LundinGold LUG-T $10.39 88.91%

AlacerGold ASR-T $6.07 84.50%

AltusGroup AIF-T $44.88 73.55%

BoydGroup BYD-T $210.00 72.79%

ElementFleetMgt. EFN-T $12.56 69.88%

HomeCapitalGroup HCG-T $28.45 64.93%

DreamUnlimited DRM-T $12.75 59.66%

Boralex BLX-T $28.65 58.66%

BarrickGold ABX-T $25.60 56.07%

YamanaGold YRI-T $5.23 54.39%

KinrossGold K-T $6.75 53.76%

PanAmericanSilver PAAS-T $26.57 53.04%

CeridianHCMHoldings CDAY-T $95.94 49.74%

Franco-Nevada FNV-T $144.10 47.04%

AlgonquinPower AQN-T $20.40 45.90%

DataasofMarch1.Source:Bloomberg

T

he markets conjured grim
visions of collapse and ru-
ination as stocks tumbled
into the end of February. The
quick correction might be a
mere panic attack or the harb-
inger of things to come.
Signs of a serious decline can
be gleaned from the behaviour
of momentum stocks, which of-
ten act like canaries in the mar-
ket’s coal mine.
Momentum is known for do-
ing very well in bull markets and
then disintegrating in market
crashes. I expected the first two
months of the year to have
served up a momentum mas-
sacre.
But, before diving into the
numbers, it’s worth pointing out
that most momentum strategies
are shockingly simple.
The basic idea is to buy stocks
that have gained the most in re-
cent months with the expecta-
tion they’ll continue to move
higher in the short term. It’s a
simple strategy that has worked
well for decades and even centu-
ries.
I explore the state of Canadian
momentum by starting with the
largest 200 stocks on the TSX by
market capitalization. The mo-
mentum portfolio buys an
equal-dollar amount of the 20

stocks with the highest total re-

turns over the prior 12 months,

holds them for a month, sells

them and then repeats the proc-

ess.

The momentum portfolio

generated phenomenal long-

term returns. It gained an aver-

age of 19.4 per cent annually over

the 25 years through to the end

of February, according to the

Bloomberg back-testing tool. The

Canadian market, as represented

by the S&PàTSX Composite In-

dex, gained an average of 8.2 per

cent annually over the same pe-

riod. (All of the returns herein

are in Canadian dollar terms and

are based on monthly data

through to the 28th of each

month. They include dividend

reinvestment, but do not include

taxes, trading frictions or infla-

tion.)

The momentum portfolio’s re-

turns would have been lower in

practice owing to the costs and

frictions caused by monthly re-

balancing. It would also have

needed a good deal of effort to

maintain over the years. Perhaps

most importantly, sticking with

momentum would have been

murderously hard.

Problem is, there were 14

months when the momentum

portfolio fell by more than 10 per

cent. The crashes of 2000 and

2008 were horrific.

In 2000, the momentum port-

folio lost 7 per cent in March, 38

per cent in April and 24 per cent

in May. Just imagine sticking

with the portfolio after that

string of losses. Most investors

would have given up. In total,

the portfolio fell almost 60 per

cent from its early 2000 high to

its 2001 low.

Similarly, the 2008 crash saw a

16 per cent decline in September,

followed by a 34 per cent decline

in October.

The portfolio gave up 51 per

cent from the top in 2008 to the

low in early 2009.

Dou can see the power of neg-

ative momentum in the accom-

panying graph.

That brings me to the experi-

ence of recent months, which –

contrary to my expectations –

wasn’t that bad. Des, the momen-

tum portfolio fell, but it gave up

just 1 per cent in January and 6

per cent in February. While the

declines might be a precursor of

worse things to come, they we-

ren’t unusually bad ones for the

method.

The momentum portfolio,

shown in the left accompanying

table, currently contains a heavy

dose of gold and precious metals

stocks, which might provide a

buffer against further market de-

clines. Time will tell.

While the momentum canary

hasn’t given up the ghost in Can-

ada quite yet, I’ll be keeping an

eye on the little fellow. But I

hope the new coronavirus will

prove to be milder than expected

and short-lived. I wish everyone

good health and good fortune in

the months to come.

Momentumstocks:Thecanaryinthemarket’scoalmine

NORMANROTHERY

PhD,CFA,founder
ofStingyInvestor.com

DownsideofmomentuminCanada

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INSIDETHEMARKET