Polaris infrastructure: Tuning out today to focus on tomorrow

Having worked at more than my share of “big companies”, I was often subjected to the short term nature of decision making. Quite often, decisions were driven for “optical” reasons that produced sub-par results over the long term, but made one particular group happy over the shorter tem. The company, having boxed itself in by one bad decision, would continue to lurch from quarter to quarter – healthy enough to stave off impending insolvency, but still trying to staunch the bleeding from some poorly executed acquisition.

Companies are not unlike people – they have different motivations, and do things for different reasons. Like people, some have a very short term view of things, while others might be able to see the proverbial “forest for the trees”.

The same is true for investing. Early in my investing career, I was also guilty of focussing on the shorter term picture. While the balance sheet and the income statement of today (and yesterday) provide a clear picture, that picture is only that – the picture of “today”. I was focussed on what had happened, but largely unable to think about what could happen. I eventually realized that my focus on the present (and the past) caused me to eliminate many potentially sound investments because, in their present form, they looked too ugly.

If you are an investor who takes an interest in particular companies, the ability to see beyond the ugliness of today is crucial. For that matter, even if you are an index investor, the ability to see beyond present market conditions when the headlines are screaming panic, is also crucial. The problem with humans is that our brains are still wired for the newsflash about the stampeding herd of wildebeest – better to stay in the cave a little longer, than risk getting trampled like your cousin Larry. In the meantime, the herd is long gone.

Those of you that are familiar with my investment philosophy know that I subscribe to a somewhat unorthodox style. A part of my portfolio is always reserved for the ugly and the misunderstood, as these companies can sometimes provide investment returns bordering on the unheard of. With this in mind, I try my best to look beyond the sometimes dismal financial statements of today, to see if there are any bright spots of future improvement.

Often times, these are small things that don’t scream “improvement”, but require a bit of research. Things like adoption of a particular companies product (or a similar one) by a new market segment, new government legislation that favours the adoption of a particular companies product, or changes in macro economic events can often turn a small companies fortunes on a dime. By the same token, keeping an eye out for similar things that might imply negative impacts for a particular company is also key. Either way, sometimes the most useful investment information about a company is not found in its own present day statements, but in an unrelated press release about another company, the general economy, or shifts in social issues.

An excellent example of this is a company which I had been following for some time, Polaris Infrastructure. Polaris was formed when RAM Power, the predecessor company, was recapitalized, resulting in a significant reduction in debt and the associated de-levering of the balance sheet. The newly formed Polaris Infrastructure was concentrated both with respect to geography and business lines, as they operate geothermal electrical generation in Nicaragua. Add to this fact that the company reported in US dollars, but traded on the Canadian TSX exchange, and you can understand why it may have flown under the radar.

Many investors were distracted (and still are) by the fact that this small company was operating in a foreign jurisdiction, traded on a non-US exchange, and had a chart that looked like the last half of a roller coaster. However, missed in this was the fact that the company is effectively an electrical utility, providing “clean” power via fixed contracts denominated in US dollars. My curiosity in the company was piqued significantly in 2016, as crude oil (and the Canadian dollar) both proceeded to fall precipitously. Polaris, with its contracts denominated in US dollars, also initiated a dividend in US dollars.

 

For investors in the frozen north such as myself, we could buy Polaris in Canadian dollars, but receive a dividend denominated in US dollars, which would then benefit from the falling Canadian dollar vs the US dollar exchange rate. As one can see, many of the most interesting things about this story were not to be found on the pages of the most recent financial statements, and required a bit of “looking beyond” the current information. I purchased Polaris in early 2016, and have been holding it ever since. Eventually, the CAD-USD exchange rate will move again, but by this time, it’s likely that Polaris will have added more generation capacity, which should increase cash flow & the associated dividend.

 

In this particular example, the current focus on clean energy and the changing exchange rate landscape were perhaps the two key things that were not to be found on the income statement or balance sheet. These two things pointed to how this companies fortunes might pan out vs what was happening “right now”. If nothing else, it highlights the fact that it never hurts to keep an eye out for “where the puck is going” as opposed to “where it is right now”, as you’re far more likely to make a good play at the end of the day.

 

Please note – this post is not meant as an endorsement of Polaris Infrastructure, or as a suggestion that the reader should invest at this time (or at any time)  in this company.  The company is mentioned and discussed only in the context of demonstrating a particular investment philosophy or style.