Manager’s Quarterly Commentary – David Barr – Q2 2016

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We’ve had an exciting start to the year. We started off with a big drawdown in energy markets and now, at the midpoint of the year, major indices are hitting highs and everything is fine. Then again. I was speaking to my neighbour yesterday and he commented on the strong recent performance in the markets and thought that I would be really happy. Our reality is that whatever happens in the market neither makes us happy or sad. What drives our investment team is the underlying fundamental performance in the companies that we own.

In the current market our constant focus on the business and not the stock price leaves us feeling like we’re on a desert island. All around us stocks and indexes are having rapid, dramatic moves. Last quarter, TSX was up 4.2%, the TSX Info Tech Index was down -5.6%, BMO Small Cap raced up 14.7%. The Russell 2000 was up 3.4% while the tech heavy Nasdaq was down -0.6%.


Our focus on the fundamentals of the companies we hold can make it hard to provide “exciting” commentary on a month to month, or even a quarter to quarter basis. This is natural when your time horizon is three to five years. Our goal is to generate strong capital appreciation over the long term and reduce any potential downside by understanding the key risks and drivers of our underlying investments. Our experience has demonstrated that the best way to do this is to identify businesses with strong underlying economics, buy them cheap and then let the actual business drive returns.

We can start to sound like a broken record because when we find these companies we want to own them for a long time. While we hold them, we are continuously looking for signs that our investment thesis is intact or has been impaired. When intact we smile and carry on. When impaired, we frown and move on.

Portfolio Highlights

This brings me to two of our longest held positions, QHR Corporation (TSX-V: QHR) and TIO Networks (TSX-V: TNC). These are businesses we know extremely well and in which we large shareholdings. When we initially purchased both businesses they had market caps well below $100 million. Today through organic growth and strategic initiatives, both companies have grown and now sit with market caps of $100M and $200M respectively.

We believe both companies are in the early stages of sustained periods of growth and our investment thesis remains intact and continues to play out.

QHR Corporation

QHR is a leading healthcare technology provider and currently has the largest single Electronic Medical Records (EMR) platform in Canada, the second largest provider of EMR behind Telus. We believe that the future of EMR is a two horse race in Canada, a strong position for a vertical software company like QHR. Its size in the market provides it with strong network effects. More users, means more customer feedback leading to more revenue. They have more money than smaller independent competitors to improve their products and can do so referencing the extensive customer feedback they receive, compared to competitors. The discussion of competitive advantage can always seem subjective so we look for quantitative evidence to support or refute our conclusions. In this case, QHR has been able to demonstrate strong organic revenue growth, with a very impressive 70% win rate in competitive situations. Clearly, QHRs customers share our opinion of the product.

TIO Networks

TIO Networks is a cloud based, multi-channel bill payment processor serving many of the largest telecom, wireless, cable and utility network operators in North America. The company has now built a nationwide real time, payment platform with one of the largest biller networks for the cash preferred customer in North America. This network of locations and billers should drive strong network effects and increased usage. In the last quarter, like QHR, we saw organic revenue growth but the really interesting part was that this was partially driven by price increases. Nothing screams competitive advantage to us more than when a company can raise prices!

Looking Forward

We think these markets are presenting interesting opportunities. The combination of the zero interest rate policy driving capital out of “capital appreciation” assets to “safe-income” investments along with ETFs making asset allocation moves that we can take advantage of means that opportunities continue to present themselves. These factors are driving dramatic and rapid variations in securities prices. For the patient, fundamental investor, this makes for a fantastic stock pickers market.

David Barr
July 28, 2016

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