Globe Unlimited’s Inside the Market is continually canvassing the buy side on their latest stock trades. Here are three Canadian money managers on their recent transactions.
The portfolio manager: Bruce Campbell, Campbell Lee & Ross
The sale: Gildan Activewear Inc. (GIL-T)
Over the first quarter of this year, enthusiasm for U.S. consumer stocks drove up Gildan shares a little too far, Mr. Campbell said.
Like many money managers, he was looking to build up exposure to the consumer sector last winter. His motivation was in part based on the idea that savings at the gas pumps would translate into a bump in consumer spending.
He had followed Gildan for several months prior to that, but was deterred by valuation – it was a stock that offered few entry points, having followed a pretty smooth upward trajectory for the prior three years.
“We waited for the quarter hoping they would miss,” he said. “And when they missed, we pounced.”
Last December, Gildan fell short of fourth-quarter earnings estimates and warned of an expected loss in the first quarter. The stock fell by more than 10 per cent to close at just above the $30 mark, which proved to be a bottom. Mr. Campbell got into the stock at $30.50 a share and expected to own it for a few years. He anticipated gains from increased market share and manufacturing capacity, both of which boosted by acquisitions.
He said he thought Gildan shares might reach the $40 mark within two years. It got there in a little more than four months. By mid-April, the stock had risen by more than 45 per cent from its low. “It forced our hand by doing so well,” he said.
“It’s a good company and it’s well-managed, but it doesn’t deserve a 20-plus multiple.”
He sold his stake in Gildan in mid-April at a little less than $39 per share.
The portfolio manager: Felix Narhi, PenderFund Capital Management
The purchase: Kennedy-Wilson Holdings Inc. (KW-N)
This stock may not necessarily screen all that well, but a little digging quickly gets one past what might appear to be an overvalued stock, Mr. Narhi said.
Kennedy-Wilson is a global real estate investment and services firm that tends to be drawn to distressed markets, like the western U.S. after the real estate bubble burst and Ireland in 2011-12.
But the company tends to hold most of their assets at cost, so the accounting can be misleading, Mr. Narhi said. “It’s now a totally different environment in Ireland, but at a lot of their assets are still priced at 2010 prices.”
The company is now focused on other parts of Europe, where financial institutions are forced to sell real estate assets at discount prices, Mr. Narhi said.
While the Kennedy-Wilson management team has a solid track record of generating returns, the stock has been mostly range-bound between $24 (U.S.) and $28 for the past year.
The company is based in the U.S., but a big chunk of its assets are located in Europe, so earnings have been pinched by the appreciation of the U.S. dollar.
The stock currently trades at a substantial discount to its net asset value, which has doubled over the past three years to about $30 a share, Mr. Narhi said. He sees it doubling again over the next five.
PenderFund bought through May and June at an average cost of $24.90.
The portfolio manager: Ed Lugo, Franklin Templeton Investments
The purchase: Lar Espana Real Estate SA (LRE-BME)
Private equity firms in search of distressed assets are flocking to Spain, where commercial real estate values fell by 40 to 60 per cent, and are beginning to show signs of recovery.
Spanish office properties, which were doubly struck by the global recession and by the European debt crisis, rose in value by about 12 per cent from the end of 2013 to the end of last year, Mr. Lugo said. “It’s just catching the beginning of the upturn.”
The company is run by Miguel Pereda, who, along with his brother Luis, have established a solid track record in property development and management in the Spanish market, Mr. Lugo said. “These guys can get deals done,” he said. “It’s not some new guy coming into Spain trying to buy properties.”
He bought into the company’s March, 2014, initial public offering on the strength of the management team and balance sheet, on top of an attractive valuation.
The stock is now trading below its IPO price, driven down of late by the flare up in euro zone debt concerns emanating from Greece.
Mr. Lugo has been building up his position in the stock ever since the IPO, having last bought in late March with the stock trading at about €10 ($14) a share. Franklin is now the company’s largest shareholder with about 15 per cent of outstanding shares.
“After we reach a certain level of ownership, we don’t buy any more. We don’t want it to be too difficult to get out of,” Mr. Lugo said. “We’d love to buy more, but we can’t.”