Daniel Lloyd, founder and portfolio manager at Sui Generis Investment Partners
Focus: Canadian equities
Our opinion of the market is little changed since our last appearance on Market Call, though we would be remiss if we didn’t admit that we were caught entirely off guard by the aggression with which stocks rallied after the U.S. election. Investor sentiment is near all-time highs, the use of margin debt is near all-time highs, and equity valuations are near all-time highs, all while interest rates appear poised to march higher. This is not typically a recipe for strong equity returns over the coming months. We believe a cautious approach is warranted with an emphasis on very specific sectors, which should yield outperformance over the coming months. Gold equities appeal to us as we believe the likelihood of U.S. policy missteps and/or disappointment is particularly high at the moment. Inversely, we would exercise caution as it relates to the consumer as rising gasoline prices and rising interest rates are not typically conducive to increasing consumer spending.
SHORT: CI FINANCIAL (CIX.TO)
This trade has moved against us over the last couple months, but we have included it in our top picks again to emphasize that this isn’t a two- or three-month trade, but rather a structural short. In spite of the shares being strong, CIX’s fundamentals haven’t strengthened in any way and in fact, their net sales have continued to deteriorate. We believe the mutual fund business is in structural decline and CI specifically is seeing strong net outflows of capital while still trading at what we believe is an excessive multiple (eight per cent of AUM). Management fee pressure, competitive pressure and regulatory pressure are all conspiring against CIX right now. It would seem as though company insiders are the only ones who agree with us for the time being, having sold nearly $30 million in stock since our last appearance on Market Call.
LONG: BAYTEX ENERGY (BTE.TO) / SHORT: CANADIAN NATURAL RESOURCES (CNQ.TO)
We believe that at least for the first half of this year, oil prices could drift higher on OPEC supply reductions. While we acknowledge that left on its own the oil market is structurally oversupplied, we do believe that Saudi Arabia will attempt to buoy oil prices, at least until they complete the IPO of Saudi Aramco later this year. Between the reductions in OPEC supply, the weekly additional rigs in the various U.S. unconventional basins and what we see as an environment for heightened geopolitical risk, there are many moving parts in the oil market right now. With so many variables, it is inadvisable to take on very much unhedged exposure to oil at this stage, so we prefer to get long some oil “torque” in Baytex, a higher-cost heavy oil producer in Canada with reasonable assets in the Eagle Ford in Texas, while shorting a large, expensive diversified name like Canadian Natural Resources against it.
LONG: NORTHLAND POWER (NPI.TO)
Northland has been running a process to sell itself, with initial bids having been submitted about a month ago. We believe that in an auction, the assets are worth a minimum of $26 and could fetch closer to $30. This is the sort of event-driven trade we like in an uncertain market environment. Very large insider ownership should ensure that if a deal does get announced, it is unlikely to be contested. Further, if the company does not execute on a corporate transaction, our discounted cash flow value on the stock is a shade less than $30, still a nice lift from here. We entered the position when the shares sold off following the election of Donald Trump, but we believe they’re still very much a buy here, with or without a takeover.
PAST PICKS: NOVEMBER 9, 2016
SHORT: CI FINANCIAL (CIX.TO)
- Then: $25.31
- Now: $28.39
- Return: -12.16%
- TR: -13.10%
COTT CORPORATION (BCB.TO)
- Then: $17.65
- Now: $14.60
- Return: -17.28%
- TR: -16.86%
SHORT: EMERA (EMA.TO)
- Then: $45.92
- Now: $45.42
- Return: +1.08%
- TR: +1.08%
TOTAL RETURN AVERAGE: -9.62%
FUND PROFILE: SUI GENERIS INVESTMENT PARTNERS MASTER LP
ESTIMATED PERFORMANCE AS OF DECEMBER 2016:
- 1 month: Fund 2.00%, Index* 1.36%
- 1 year: Fund 5.26%, Index* 16.43%
- Since inception (March 2016): Fund 10.00%, Index* 1.01%
* Index: TSX
* Reinvested dividends/net of fees