Aug 30, 2016

Eric Nuttall's Top Picks: August 30, 2016

BNN Bloomberg

Eric Nuttall , BNN

Eric Nuttall, Portfolio Manager, Sprott Asset Management

Focus: Canadian oil & Gas Stocks & Canadian Small Cap Stocks

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MARKET OUTLOOK:

The oil market remains undersupplied (draws from OECD inventories) and while the YOY level of oil is still higher than last year, the direction of the oil price will be dictated by the continuation of inventory draws as a signal to an inevitable rebalancing. The now 2+ year oil bear market is bearing witness to the greatest collapse in oil production around the world, in history and given continued strong demand growth despite perennial economic worries, we continue to believe that oil will trade to $60/bbl in 2017. September is usually a volatile month for both oil stocks and the general market and with much drama revolving around a freeze/no freeze decision later in the month we maintain a defensive posturing with a bias to be fully invested heading into late fall. The Sprott Energy Fund is the top energy fund in Canada on a YTD and three-year basis outperforming the average Canadian Energy Fund by 9 per cent/year for three years.

Top Picks:

NYX Gaming Group (NYX.V)

NYX beat consensus EBITDA on Monday by 11 per cent and was rewarded by a 2 per cent move in the stock. The company trades at a 18 per cent free cash flow yield, 7X 2017 EBITDA (versus EU-listed peers at 15X) and 6X 2018 earnings (despite forecasted 39 per cent EPS growth 18/17). By any measure this stock is undervalued. With its M&A buying binge behind them (and with it opaque quarterly releases) we look to their Q3 release in November to clearly demonstrate the cash flow and earnings generating power of the company. If the company were to trade at only 2/3 of its peer average the stock would be ~ $3.80 = 100 per cent upside. The valuation currently makes no sense.

American Hotel Income Properties (HOT_u.TO)

AHIP offers a 8.4 per cent dividend yield which to us appears highly sustainable as cash flow per unit continues to grow (13 per cent growth last quarter) and its payout ratio is below 75 per cent. While the company has tapped the equity market several times to fund the expansion of its branded hotel strategy (acting as a lid on the unit price) we believe the stock could slowly get rerated with a pending recovery in the oil price as demand in oil-producing markets and subindustries improves.

Birchcliff Energy (BIR.TO)

Through its transformational deal with EnCana Birchcliff has eliminated all of the historical objections that prospective investors had: too much debt, too much control from one investor, too much dry gas and too little inventory. Birchcliff today offers investors the cheapest way to get exposure to the most relevant liquids rich gas play in Canada. Generalist investors are still sharpening their pencils on the name so there remains latent buying power. The stock trades at 7.2X/5.9X 2017/2018 EV/CF and given modest multiple expansion to 8.0X we think BIR could trade to over $13 in a year offering 45 per cent upside.