6 Value Stocks to Watch

Key Concepts

• Value Investing: A strategy of selecting stocks that appear to be trading for less than their intrinsic or book value.
• Margin of Safety: The principle of buying a security at a price significantly below its estimated intrinsic value to minimize downside risk.
• Free Cash Flow (FCF) Yield: A financial solvency ratio that compares the free cash flow per share a company is expected to earn against its market value per share.
• Economic Moat: A business's ability to maintain competitive advantages (e.g., high barriers to entry, market share) to protect its long-term profits.
• EBITDA Multiple: A ratio used to value a company by comparing its Enterprise Value to its Earnings Before Interest, Taxes, Depreciation, and Amortization.
• MRO (Maintenance, Repair, and Overhaul): The industry focused on the inspection, repair, and maintenance of aircraft and engines.
• LEO (Low Earth Orbit) Satellites: Next-generation satellite technology used for global broadband and telecommunications.

Value Investing Philosophy

Callan Stewart emphasizes that value investing is a "tried and true" strategy that has historically outperformed growth investing over 50–70 year horizons. The core methodology involves:

1. Fundamental Analysis: Focusing on cash flow, strong balance sheets, and business quality.
2. Defining Downside: Using predictable cash flows to establish a margin of safety.
3. Contrarian Approach: Investing in "unloved" or "misunderstood" businesses that are currently in the "penalty box" due to temporary market sentiment.
4. Criteria for Selection: Seeking companies with high barriers to entry, dominant market share (top 1 or 2 in their industry), and high returns on capital with low capital expenditure (capex).

Featured Value Stocks

1. Magellan Aerospace

• Thesis: A play on the multi-year growth in defense spending (NATO) and the massive commercial airline backlog (Boeing/Airbus).
• Details: A global Canadian-based manufacturer of aero-body structures.
• Valuation: Trades at ~8.8x EBITDA; offers a dividend.

2. Telesat

• Thesis: Transitioning from legacy geo-intelligence satellites to LEO technology.
• Details: Strong government relationships and potential for significant upside if they capture even 1% of the global LEO market.
• Risk/Reward: High debt, but potential for $3+ in annual EBITDA.

3. Standard Aero

• Thesis: Capitalizing on the global engine shortage and aging aircraft fleets.
• Details: A leader in the MRO space with 75%+ of revenue tied to long-term contracts, providing high predictability.
• Valuation: Trades at ~12x forward EBITDA.

4. Altus

• Thesis: Market overreaction to AI disruption fears in the software sector.
• Details: Provides the "Argus" system, the global standard for commercial real estate analytics and valuation.
• Valuation: Trades at ~10x EBITDA; high barriers to entry due to deep integration with pension funds and asset managers.

5. Kinaxis

• Thesis: A high-quality grower (15%+ annual growth) currently trading at a discount due to sector-wide software sell-offs.
• Details: Supply chain software with a "blue-chip" customer list.
• Valuation: ~13.5x EV/EBITDA; 80%+ gross margins.

6. Thomson Reuters

• Thesis: Misunderstood by the market regarding AI; the company is actually positioned to benefit from AI integration.
• Details: Leading provider of legal, corporate, and tax software.
• Valuation: Trades at ~12x EBITDA (lowest in a decade); 3% dividend yield; projected $2.1 billion in FCF by 2026.

Key Arguments and Perspectives

• AI Disruption: Stewart argues that the market has unfairly punished software companies due to a generalized fear of AI. He contends that for companies with deeply embedded, mission-critical software (like Kinaxis or Thomson Reuters), AI is more likely to be a tool for enhancement rather than a replacement.
• Defense/Aerospace: Stewart views this as a secular, decade-long trend driven by geopolitical shifts and increased NATO spending.
• Market Sentiment: The "contrarian" perspective is essential; Stewart notes that when high-quality companies are down 50–60% from their highs due to temporary sentiment, it creates an ideal entry point for value investors.

Synthesis

The core takeaway is that value investing remains a disciplined, logical framework that relies on identifying high-quality businesses with "moats" that are currently trading at depressed multiples. By focusing on free cash flow, predictable revenue streams, and ignoring short-term market hysteria—specifically regarding AI disruption—investors can find significant upside in sectors like aerospace, MRO, and enterprise software. Stewart’s approach prioritizes companies that are "misunderstood" rather than fundamentally broken.