Daniel Lloyd, founder and portfolio manager at Sui Generis Investment Partners

Focus: Canadian equities
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MARKET OUTLOOK
Canadian equities have been generally weak in 2017 on the back of particularly weak energy prices and a rising Canadian dollar. With the Bank of Canada indicating its inclination to raise interest rates from current levels, unfortunately we don’t see a respite from the weakness though we do think a sector rotation is in the cards. The picture is particularly muddy because we are bullish on crude and natural gas prices from current levels and this makes it difficult to be bearish on Canada, but dollar strength certainly isn’t helping Canadian exporters and we are struggling to find good value outside of the extremely under-owned energy group. The result is a tightrope that we would suggest requires a great deal of caution when attempting to cross. It also seems wise to have some exposure to gold as an insurance policy should the geopolitical situation deteriorate.

TOP PICKS

SHORT: CI FINANCIAL (CIX.TO)
We still have this trade on and in spite of the recent rise in the shares, it has been a good short for us. The long-term prospects for the retail mutual fund industry are not particularly constructive with fee compression and competition for assets coming from the ETF industry. CI still suffers from particularly weak net sales (saw an AUM decline of 1.5 per cent in June) and declining fees. At approximately eight per cent of AUM, the valuation on the stock is still excessive and we believe prohibitive for an acquisition to take place, though that is the risk to this pick. In spite of that risk, we believe CIX is a long-term structural short and should continue to underperform the broader market.

LONG: GOEASY (GSY.TO)
This is the most recent addition to our portfolio and we are not yet close to what we would call a full position. goeasy is a very well-run Canadian alternative consumer lender consisting of easyfinancial, which provides personal installment loans, and easyhome, which provides leasing of various home products, appliances and furniture. While the leasing business is a cash cow that’s been slowly declining in revenue in recent years, the income it generates and existing easyhome stores allowed management to transition their focus to easyfinancial and to expand the consumer lending business into a profitable and fast-growing leader in the Canadian alternative lending space. The large net interest margin — which comes as a result of the high, effective annual return on earning assets and low cost of funding as well as a 58 per cent leverage ratio — provides a significant buffer to potential increases in cost of funding or higher-than-expected charge-offs. Recent concerns regarding the Canadian housing market have weighed on GSY’s share price, though the company is not involved in the mortgage lending space. We would view credit cycle turning as the real risk to this stock moving forward, and as a result would look to hedge out our exposure by shorting another lender we believe does not possess the safety nets GSY does. At a nearly 20 per cent ROE and with high growth prospects, goeasy is undervalued at current levels.

PAIR TRADE:
LONG: TRICAN WELL SERVICES (TCW.TO) / SHORT: PASON SYSTEMS (PSI.TO)
While the performance of both companies/stocks should be largely dependent on energy prices going forward and both have very solid balance sheets, we believe frack intensity is an attractive theme within the energy services space at the moment and thus believe that it makes sense to be long across the fracking value chain. TCW trades at half the cash flow multiple Pason does, something we think is entirely unjustified. Inversely, we believe Pason is in a difficult position, currently holding the lion’s market share of the well completions business in Canada with aggressive discounting happening amongst their peers. There is evidence of competitors (PHX) undercutting them on price solely to win market share, which is a difficult thing to profitably defend against. The stock is expensive at more than 20x cash flow and has recently seen large insider selling.
 

PAST PICKS: JULY 5, 2016

ZCL COMPOSITES (ZCL.TO)

• Then: $8.59
• Now: $12.86
• Return: +49.57%
• TR: +61.90%

PAIR TRADE:

• LONG: SECURE ENERGY SERVICES (SES.TO)
  • Then: $8.54
  • Now: $8.77
  • Return: +2.69%
  • TR: +5.41%
     
• SHORT: PRECISION DRILLING (PD.TO)
  • Then: $6.76
  • Now: $4.07
  • Return: +39.79%
  • TR: +39.79%

SHORT: CI FINANCIAL (CIX.TO)

• Then: $26.77
• Now: $27.95
• Return: -4.40%
• TR: -9.98%

TOTAL RETURN AVERAGE: +32.37%