Why Extendicare still offers extended gains in a volatile time

Benj Gallander, Ben Stadelmann, and Philip MacKellar
September 6, 2019

Our crystal ball is often murky, but at this juncture it looks relatively clear. We would be amazed if a recession does not bite before the end of 2021. So many ingredients are in place, including the longest bull run in history, the inverted yield curve, ballooning government debts, individual debt in Canada that is at its highest level ever, and tariff wars. Throw in the Brexit tumult and it looks like a lethal brew.

The strategy at Contra has been to buy less and be heavy on the sell button when stocks reach our targets. Unfortunately, the latter has not been happening as often as we would like. Bear in mind, selling only because a major downturn might be in the wind is not our modus operandi.

While we do most of our tax-loss selling in the spring, those with losers that they wish to dispense will find that now is a better time to do it than the end of the year, when the laggards finally get their act together to peddle. The rush to sell at the last minute pushes up supply, thereby lowering prices. Not a wise strategy, to be sure.

One stock that we wrote about three years ago and appears to remain a good buy today (at around the same price of $8.30) is Extendicare. Benj purchased this at $7.01 in 2014, when the risk was higher because the enterprise was dealing with litigation from the US Department of Justice and the Office of the Inspector General of the US Department of Health and Human Services. Those are a couple of heavy hitters.

Ultimately, EXE paid $38 million (US) to wash its hands of the affair, sold off its American operations and focused on its Canadian roots, with pockets fuller by about $1.2 billion, once again focusing on the company’s Canadian roots.

Since we last looked in on it, revenue has increased by about 12 percent, and growth should continue when the Barrieview facility is opened in the fourth quarter. Already, deposits have been received for 71 percent of the suites.

The bottom line has remained black. Debt, although higher than our preference, has remained both stable and manageable. The weighted average interest rate is only 4.8 percent and could potentially go down in the not-too-distant future.

There are two primary reasons to be far more excited about this stock than others during these particularly iffy economic times. The first is that this is a fabulous demographic play. The Canadian population is getting older and places are needed to house seniors during their geriatric years. Governments recognize that this is an area they must subsidize.

Then there’s the fat dividend. Currently, it pays about 5.75 percent. Add onto that the dividend tax credit, and the return is very handsome compared with most alternatives. The payout also seems reasonably secure.

Meanwhile, it seems quite feasible that the stock price could move up by 50 percent or more, getting back into the zone where it traded a number of years ago.

All told, this concern registers with us as a relatively defensive play during these very volatile times.