NFI has very minimal competitors in a space where they're able to increase prices: Teltscher

Key Concepts

• Cyclical Stocks: Stocks of companies that tend to perform well during economic expansions and poorly during economic contractions.
• Defensive Characteristics: Qualities of a stock that make it less susceptible to economic downturns, such as stable demand for its products or services.
• Secular Growth: Long-term growth trends that are not tied to the business cycle.
• Long-Term Contracts: Agreements that provide a predictable stream of revenue over an extended period.
• Government Spending: Public investment in infrastructure, defense, or other sectors that can drive demand for companies.
• Pilot Shortage: A projected deficit in the number of qualified pilots, creating demand for training and simulation services.
• Nuclear Power: A source of baseload energy that is considered important for the future, especially with the growth of renewables.
• Small Modular Reactors (SMRs): Compact, prefabricated nuclear reactors that can be deployed more quickly and at a lower cost than traditional nuclear power plants.
• Transit Projects: Public transportation initiatives, such as light rail transit (LRT) lines, which are often government-funded and considered essential.
• Electric Buses: Buses powered by electricity, reflecting a trend towards electrification in public transportation.
• Supply Chain Issues: Disruptions in the flow of goods and materials that can impact a company's ability to produce and deliver its products.
• Backlog: The total value of orders that a company has received but has not yet fulfilled.

Cyclical Stocks with Defensive Characteristics

The discussion focuses on three cyclical stocks that the portfolio manager, Rebecca Telure of New Haven Asset Management, finds attractive due to their underlying defensive characteristics, despite their inherent volatility compared to more stable investments like utilities. These companies are chosen for their secular growth potential, long-term contracts, and backing from government spending.

CAE Inc.

• Business Lines: CAE operates in two main segments:
  • Civil Aircraft: This segment focuses on pilot training and simulators. Despite a general aversion to airlines due to their cyclical nature and sensitivity to consumer spending, CAE is invested in this area because of a significant global shortage of pilots.
    • Market Driver: An estimated shortage of 260,000 new pilots over the next decade.
    • Services: CAE provides training and simulators for pilots, requiring a continuous progression from smaller aircraft to larger ones.
    • Contracts: Recent contracts include those with WestJet and Malaysian Airlines, highlighting long-term, continuous revenue streams.
  • Defense: This segment has historically lagged but is expected to benefit from increased government defense spending announced earlier in the year.
• Investment Rationale: Secular growth, long-term contracts, and government backing for the defense sector.
• Dividend Status: CAE is one of only two stocks in the portfolio that does not pay a dividend.

AECON

• Business Scope: AECON's business extends beyond traditional home construction to include significant work in utilities and nuclear projects.
  • Utilities & Nuclear: Over half of AECON's business involves utilities and nuclear projects. They are involved in almost every nuclear project in Canada, including refurbishments, new builds, and Small Modular Reactors (SMRs).
  • SMR Deal: AECON announced its first nuclear SMR deal in Washington State, marking a significant entry into the US market.
  • Baseload Energy: The discussion highlights the importance of nuclear power as a source of baseload energy, complementing renewable energy sources. AECON is seen as having a strong competitive advantage ("moat") in nuclear construction.
  • US Expansion: The potential to export nuclear construction capabilities into the US presents substantial growth opportunities.
  • Transit Projects: AECON also benefits from growth in transit projects, such as the Eglinton LRT and Finch line. These are considered defensive in nature, as governments are likely to continue spending on public infrastructure even during recessions.
• Financials & Outlook:
  • Stock Performance: The stock was up 13% on Friday following the SMR deal announcement.
  • Backlog: AECON's backlog is reported to be the largest in its history.
  • Secular Growth: Strong signs of secular growth are identified in its core business areas.
• Dividend Status: Not explicitly mentioned if AECON pays a dividend, but it is implied to be a more volatile stock.

NFI Group

• Business: NFI Group is a bus manufacturer.
• Market Opportunity:
  • Fleet Replacement: During the pandemic, transit companies significantly reduced investment in their bus fleets. As a result, many buses are now aged (5-7 years old) and require replacement.
  • Reduced Competition: Several competitors have gone bankrupt since the pandemic, leaving NFI with minimal competition.
  • Pricing Power: This reduced competition allows NFI to increase prices.
  • Public Contracts: NFI secures public contracts for buses, which are essential regardless of the economic cycle.
  • Electrification Trend: There is a strong demand for electric buses as transit agencies convert their fleets from traditional combustion engines.
• Production & Backlog:
  • Demand Outstripping Supply: NFI is currently unable to build buses fast enough to meet demand, with orders extending into the second half of 2026.
  • Backlog Strength: The backlog is described as "super strong."
• Challenges:
  • Supply Chain Issues: The primary problem for the stock has been supply chain disruptions, not a lack of orders. Specific issues mentioned include delays related to seating and a battery recall (not directly NFI's fault but impacting production).
• Investment Rationale: Once supply chain issues are resolved, the future earning potential is considered "really great" due to long-term contracts and stability.
• Dividend Status: NFI Group is the second stock in the portfolio that does not pay a dividend.

Conclusion

The portfolio manager highlights three cyclical stocks – CAE, AECON, and NFI Group – that are favored for their unique defensive characteristics, long-term growth drivers, and reliance on government spending and essential services. Despite their potential for higher volatility, these companies are positioned to benefit from secular trends such as pilot shortages, the need for baseload energy and nuclear infrastructure, and the replacement and electrification of public transit fleets. While supply chain issues have presented challenges for NFI Group, the underlying demand and backlog remain strong. These selections represent a strategic approach to investing in cyclical sectors by identifying companies with resilient business models and clear pathways for future growth.