Why Colliers International (CIGI) Stock is a Compelling Investment Case

Argosy Investors recently released its Q3 2020 Investor Letter, a copy of which you can download here. Year-to-date performance was 15.5% in select accounts. The S&P 500 by comparison returned 5.5%. You should check out Argosy Investors’ top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Argosy Investors highlighted a few stocks and Colliers International Group Inc. (NASDAQ:CIGI) is one of them. Colliers International Group Inc. (NASDAQ:CIGI) is a real estate company. Year-to-date, Colliers International Group Inc. (NASDAQ:CIGI) stock lost 12.5% and on October 15th it had a closing price of $68.24. Here is what Argosy Investors said:

“I purchased a small number of shares of Colliers International (CIGI) and like Heico this stake is more of a tracking position which I hope to increase over time. Colliers International is a major commercial real estate (CRE) broker, along with Jones Lang Lasalle (JLL), CBRE, Cushman & Wakefield (CWK), and several others. I believe there is a long-term consolidation occurring within the commercial real estate space, which will benefit all long-term participants in the industry.

This shift is being driven by increasing institutional ownership of CRE, meaning large private equity funds and the like. These firms are taking share from the entrepreneurial real estate players which have historically dominated the market. These institutional players are increasingly global in nature, and are looking for firms which can take care of all of their needs in-house (buying and selling, leasing, appraisals, property management, construction project management, and more). This is not a unique insight by any stretch. See below for the opportunity in CRE relative to another professional services industry, accounting. The largest providers could be several multiples of their current size in the not-too-distant future, and Colliers in particular has a chance to grow into the 3rd largest CRE player in the industry.

The challenge with the real estate brokerage business is that brokerage (buying and selling) is the largest, sexiest, and most glamorous piece of the business, the brokers who are really good get paid very well, and this is the highest margin piece of the business. There are two problems here. The first problem is that when real estate markets experience a hiccup, transaction volumes decline significantly, so the largest and highest margin business segment can be highly cyclical. CBRE, for instance, was hit so hard by the loss of business during the Great Recession that they issued debt at an 11.625% interest rate and raised equity at a price of $7.44 per share. The stock’s previous high was ~$37 in mid-2007, and is now ~$50. The second issue is that because brokerage is such a prominent piece of the business, successful brokers tend to have outsized influence on the companies’ direction.

What creates value, in our opinion, is offering a full breadth of services to clients. The stereotypical image of a broker closing deals 24 hours per day and moving on to the next customer may diminish and a new image of a broker as one who manages ongoing relationships through the full lifecycle of buying, improving, leasing, managing, and then finally selling, could take its place.

One bit of accounting minutiae; Brokers experience negative cash outflow during downturns due to timing of accrued compensation payouts. In plain English, this means that brokers can be paid large bonuses in the year after they actually earn those bonuses based on performance, so it’s just a timing mismatch that doesn’t really become apparent until a downturn causes those brokers’ fees to fall dramatically. It remains a very real cash outflow problem for brokers during times of financial turmoil. Perhaps there is a way to space out the bonus payments over multiple years to reduce the amount of cash outflows during downturns.

Colliers in particular is attractive to us because Jay Hennick, who is a major shareholder and Chairman at Colliers is well-acquainted with the value creation from frequent, recurring monthly payments. Our other portfolio holding FirstService taught Hennick all about how predictable cash flows make running a business much easier and because of his experience with FirstService that Hennick is especially focused on evolving Colliers into a similar type of operation, albeit with greater cyclicality. Through a 8% shareholding in Colliers, I believe he has enough clout to drive the direction at Colliers towards this vision of a recurring revenue powerhouse that happens to offer transaction-related services as well.

The added visibility due to lower one-time revenue sources will ultimately lead Colliers and the rest of the brokerage group to earn higher returns on capital and as a result deserve higher multiples in the marketplace. Colliers currently trades at 14.5x 2019 earnings and I expect that despite poor 2020 results driven by COVID-19 lockdowns Colliers will again reach their 2019 earnings levels and over time continue to grow earnings at mid-teens rates while improving the quality of the business.”

In Q1 2020, the number of bullish hedge fund positions on Colliers International Group Inc. (NASDAQ:CIGI) stock decreased by about 23% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t believe in CIGI’s growth potential. Our calculations showed that Colliers International Group Inc. (NASDAQ:CIGI) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.