When it comes to constructing stock portfolios, sometimes I like to get a little zany.
In 2010 I created the Lip Balm portfolio for another publication I was writing for that included a bunch of conventional stocks, like Clorox Co and Pfizer Inc., which just happened to own lip balm brands.
An investment in that portfolio would have generated a total return of 131% over the past six years compared to 108% for the iShares SPDR S&P 500 ETF.
I’m not writing this to brag but rather to remind readers that it’s important to sometimes wander off the beaten path in order to find market-beating returns.
What does this have to do with Loblaw Companies Limited (TSX:L) and Telus Corporation (TSX:T)(NYSE:TU)?
Well, not much.
But it reminded me of another story I wrote in 2014 about single-letter stocks to buy. One of my picks was Ford Motor Company (NYSE:F); it hasn’t worked out so well and is down 22% over the past two years. I blame the company for underperforming, not the stock symbol.
There are 19 single-letter stocks to pick from on the NYSE—four less than were available in 2014, but still way more than the 11 single-letter stocks trading on the TSX, only four of which have a market cap greater than $1 billion: Loblaw, Telus, Goldcorp Inc. and Kinross Gold Corporation.
I’m no gold bug, so that leaves L and T as my prime suspects. Both are good companies, so which one-letter stock should you own?
They’re different companies in different industries; it’s not an apples-to-apples comparison.
However, Fool.ca contributor Scott Brandt recently pointed to a very interesting shared commonality between the two companies. Over the summer, both Loblaw and Telus acquired leading Canadian electronic medical records (EMR) companies.
Loblaw paid $170 million for publicly traded QHR Corporation (TSX:QHR), while Telus paid $14 million for Nightingale Informatix Corp. It’s a sign that the digitization of health records continues to be a prime growth area in both health care and technology.
It’s interesting to see how both companies view their respective transactions.
Loblaw’s interest in QHR is first and foremost about helping Shoppers Drug Mart remain the leading pharmacist in the country. The EMR battleground is where it can win market share. Telus, on the other hand, has developed a significant healthcare technology entity in Telus Health; any inroads it can make in the eastern part of Canada is certainly welcomed.
These are two great companies obviously focused on continuing to develop and grow their businesses. It’s no wonder their stock performance over the past five years has been almost identical.
For me, it comes down to cash flow and valuation.
Loblaw is currently investing about $1.1 billion annually in its business to generate $3.2 billion in cash flow. Telus is spending $3.4 billion to generate about the same amount of cash flow.
Despite the fact that Telus stock is trading for 7.6 times cash flow, or 15% less than Loblaw at nine times cash flow, I just prefer companies that generate a lot of free cash. Its margins might not be nearly as high, but when you can spend $1 to generate $3 cash as opposed to spending $3 to generate the same amount of cash, I’ll take the cash generator every day of the week.
In my opinion, Loblaw is the one-letter stock to own.
