A couple of recent news stories about Onex Corporation (TSX: ONEX) has renewed my enthusiasm for the Toronto-based private-equity firm despite the fact its stock has lost 4% so far in 2018.
The first story appeared in The Globe and Mail September 7, highlighting the fact that Onex stock had dropped below 30 on the Relative Strength Index, an indication that its stock could be oversold.
I originally recommended Onex stock in May 2016 because I liked the fact that it focuses on two long-term goals to grow its business: it looks to grow its net asset value per share (NAV/share) by 15% annually while also increasing its fee-generating assets by 10% per annum, using the power of compounding to do the heavy lifting.
How has it performed over the past five years?
It has grown NAV/share by 8% compounded annually, which is well below its desired goal of 15% per year. In 2017, it managed to deliver 11% growth. However, over the same five-year period, its stock price rose by 15% compounded annually — double the growth rate of its assets.
That’s a healthy return for investors.
Regarding fee-generating assets, the company has grown them by 18% compounded annually, 300 basis points clear of its 15% goal and significantly higher than the TSX Composite Index.
All things considered, investors haven’t done too badly from Onex’s asset management.
It’s a family affair
The second story that’s caught my attention is one about family-controlled firms that appeared in The Globe and Mail September 9.
The article suggested that companies in which the founder held at least 10% of the votes or a non-founder or entity held 33% of the votes tend to outperform companies without this type of ownership concentration.
“To me, the most important factor here is the tenure of management of family-owned companies,” said Serge Godin, Founder and Executive Chairman of Montreal-based CGI Inc. “When you have 13 years [the average experience of the 100 largest U.S. family-controlled businesses], those people have much more time to master their environment, to master their competition.”
Onex CEO and founder Gerry Schwartz and his family hold 65% of the company’s voting shares, meeting the criteria for inclusion in the NBC Canadian Family Index, a group of 43 S&P/TSX Composite Index stocks equally weighted and rebalanced quarterly.
Since June 2005, the Index has delivered annualized growth of 9.0%, 230 basis points higher than the S&P/TSX Composite Index.
Interestingly, the Canadian Family Index has a much higher weighting of consumer staples, consumer discretionary, and materials stocks than the TSX; it also has much bigger representation from mid-cap stocks, the sweet spot when it comes to outperformance over the long term.
What’s this got to do with Onex?
Although Onex stock has severely underperformed Brookfield Asset Management — Canada’s biggest alternative asset manager — over the past five years, it has almost US$9 billion in uncalled capital ready to deploy when the opportunities arise. That’s nearly as much as the company’s entire market cap.
Onex might not be the global player that Brookfield is, but it’s certainly a big deal in Canada and the U.S.
While Onex stock is in an oversold position, it makes a lot of sense to consider buying this underperformer because it won’t stay this way for very long
