Jerome Hass, Portfolio Manager, Lightwater Partners

FOCUS: Canadian Mid-Caps and Long-Short Strategies

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MARKET OUTLOOK:

For most Canadians, their home is their largest investment so naturally a lot of attention is devoted to the topic. We are neither bullish nor bearish on the Canadian housing market. However, we note that a lot of companies and commentators have emphasized the low levels of delinquencies and mortgages defaults as evidence of a robust housing market and sound mortgage loan books. We do not agree. 

For largely political reasons, both B.C. and Ontario have taken measures to cool the housing market in Vancouver and the GTA. It is debatable whether the existing measures will be effective in the GTA but if they are not, new measures will be added to achieve the goal of moderating housing prices.  In doing so, it is inevitable that housing activity will drop. It is useful to note the sequence of events in the 2006-09 U.S. housing crisis. Initially housing sales dropped. A year later, prices began to fall. A year after that delinquencies and default rates began to rise. The problems that emerged in 2008 existed well before they were finally reflected in lenders’ mortgage books. Stock markets are known to be forward looking so tread carefully in housing-related stocks.


Top Picks:

Cargojet (CJT.TO)

Canada is a land of monopolies and oligopolies. Cargojet is a little-known company that operates a natural monopoly in overnight air delivery. The company controls about 95 per cent of the domestic overnight cargo business. 75 per cent of the space for cargo is pre-purchased in take or pay with customers committed to a minimum daily space. Its customers include Canada Post, UPS, DHL, Air Canada, Amazon and Purolator among others. Their largest customers are locked in with long-term contracts with 7 year average term and extension options.  At present, the company utilizes its fleet of planes for four hours per day. Growth opportunities lie in utilizing this fleet over the other 20 hours of the day. The stock is currently trades at 2018E EV / EBITDA of 6.0x while the highly competitive cargo trucking companies trade at 7.5x. We believe CJT should trade at a premium to the trucking sector. It is also a great play on the growth of e-commerce in Canada.  [We added to CJT on April 28th at $43.21]

*SHORT* Westjet (WJA.TO)

Warren Buffett recently professed a newfound zest for airlines, likening them to his successful investments in railroads. This week Westjet demonstrated why we disagree with Mr. Buffett’s view. Amid dismal Q1 earnings results, WJA announced plans to buy ten new Boeing 787 Dreamliner airplanes with an option for ten more. The estimated cost is $6.5 billion based upon list prices. Clearly, Westjet aims to go head-to-head with Air Canada and foreign carriers on international routes. So much for the industry’s newfound discipline – it just moved from the front of the bus to row 38. On top of this, last week Westjet announced plans to launch an ultra-low cost carrier – in addition to running its incumbent operations that have struggled with capacity issues. We view Westjet as a company that has lost its path – not an ideal trait for an airline from the perspective of passengers, nor investors.  [We added to our short position on May 3rd at $21.92]

Descartes Systems (DSG.TO)

There is enough excitement in the investment world, so every portfolio deserves a few boring, low-maintenance stocks. DSG is one. At the start of every quarter, Descartes knows what 90 per cent of their revenues for the quarter will be (due to recurring revenue streams) then spends the next 90 days bringing in the remaining 10 per cent of sales. Investors like that predictability. Without any major catalysts, the stock returned about 30 per cent over the past 12 months. Let’s hope the next 12 months are as boring as the last twelve. [We last added to DSG over a year ago on 4 March 2016 at $22.68]

 

Dislcosure Personal Family Portfolio/Fund
CJT  Y  Y  Y 
WJA  N  N  Y 
DSG  N  N  Y 

 

Past Picks:  APRIL 25, 2016

Tucows Inc. (TC.TO)

  • Then: $31.40
  • Now:$83.27
  • Return:165.19%
  • TR: 165.19%

Callidus Capital (CBL.TO)

  • Then: $13.72
  • Now: $13.89
  • Return: 1.23%
  • TR:8.28%

Pair Trade: *Long* Air Canada (AC.TO) / *SHORT* Air Transat (TRZ.TO)

*Long* Air Canada (AC.TO)

  • Then: 8.32
  • Now: $13.57
  • Return: 63.10%
  • TR: 63.10%

*Short* Air Transat (TRZ.TO)

  • Then: $8.17
  • Now" $6.00
  • Return: 26.56%
  • TR: 26.56%

Total Return on pair trade: +89.66%                                               

Total Return Average: +87.71%

Dislcosure Personal Family Portfolio/Fund
TC N Y  N
CBL Y Y Y
AC N N Y
TRZ N N Y

 

Fund Profile: Lightwater Long Short Fund

Performance as of: 30 April 2017

  • 1 month: Fund 3.0%, Index*0.25%
  • 1 year: Fund 9.3%, Index* 11.7%
  • 3 year: Fund 18.3%, Index*18.3%

* Index: S&P / TSX Composite Index.

** Returns provided are net of all fees and expenses.  3 year figures are annualized returns.

Company Twitter Handle: @LightwaterPart

Company Website: www.lightwaterpartners.com