It was through a story in Canadian Business that I became aware of Gaelen Morphet. The magazine featured one of Gaelen’s largest and most successful holdings: Alimentation Couche-Tard. It’s a stock that she continues to hold today. Alimentation Couche-Tard has been such a high-flying stock that Gaelen’s been forced to sell portions of it over time, taking profits off the table, and reducing its position size in her portfolio.
In her role as chief investment officer at Empire Life Investments, Gaelen oversees a number of funds. The flagship, Elite Equity Fund, has returned 9.8% since its inception. The other funds comprise Empire Life’s “first family of mutual funds.” In total, Gaelen is responsible for approximately $9 billion in assets.
On top of having a knack for picking the right stocks, Gaelen has also been known to make superb calls on the direction of the market. One such call in 2012 turned out to be right on the money, so to speak. In a June 2012 article in the Morningstar Manager Monitor, Gaelen said, “We’re actually in a sweet spot right now. As a value investor, you try and capitalize on the emotionalism of the market to buy names when they’re cheap and sell them when they’re expensive. Almost every stock out there is a value stock right now.”1 And sure enough, after a broad market decline that started in 2011 and was perpetuated by the Euro Crisis, the TSX finally started to turn up in 2012, and continued to rally all the way into late 2014.
How does Gaelen make such bang-on calls? The answer is that she employs her margin of safety model. Gaelen scans the market on a weekly basis and measures the margin of safety (the difference between intrinsic value and market value) in individual stocks based on Graham and Dodd’s teachings about fundamental value investing. Gaelen then invests in stocks that are below their long-term or intrinsic value. She’s refined Graham and Dodd’s framework and models intrinsic value using a combination of current book value, return on equity, earnings per share for the next two years, projected book value, normalized return on equity, normalized earnings per share, and relative P/E ratio. She uses that information to determine the net present value of a company — in a similar way to the discounted cash flow model. You’ll learn more when you read through our conversation.
Gaelen was relaxed, composed, and open to sharing her stories with me. She removed her thick-rimmed glasses when she wanted to emphasize a point. We met in a large room at Empire Life that could probably have accommodated 20 people.
Catalyst: an event that positively affects a value stock and sends the stock price higher (for example when a company finally reverses a decline in revenue or a management change).
Irrationality: a general enthusiasm for a limited period in the markets that inflates asset prices to a level not supported by fundamentals.
Long-term: a holding period for a stock usually greater than one year.
Overvalued: assets that are priced considerably over their fair value or intrinsic value.
Portfolio Manager: a finance professional who manages the investments in a portfolio.
Sentiment: the common feeling or emotion that participants in the market share.
Short-term: a holding period for a stock usually less than one year.