To better understand what Canadian investing professionals are buying and selling and why, we canvass the buy side for the rationale behind their recent investment decisions. Here are three money managers on what they have been buying.
The portfolio manager: Ryan Bushell, Leon Frazer
The purchase: AltaGas Ltd. (ALA-TSX)
The energy sell-off has battered stocks with even the most tenuous links to the oil and gas sector. So there was little hope for AltaGas, which has two strikes against it in its very name – Alberta and gas.
Granted, the company’s growth outlook diminishes when crude oil declines from more than $100 (U.S.) a barrel to $30, as it did starting in mid-2014.
But power generation and utilities account for a big majority of the company’s operating income.
“Commodity exposure in their business is relatively small,” Mr. Bushell said. The 50-per-cent decline in AltaGas shares over the course of the crude correction up to mid-January, he said, might be considered “unfair.”
The oil and gas storage and transportation subsector has been so clobbered recently that the group’s average yield rose close to the highs of the financial crisis. One key difference, however, is the current gaping spread between the yields on those stocks and the highest quality long-term bonds – falling government bond yields are generally bullish for income stocks like pipelines and utilities.
AltaGas was among the group’s greatest casualties, with a yield that exceeded 6 per cent in mid-January as its shares fell to about $28, which is when Mr. Bushell topped up his position in the stock.
“I think a lot of that was collateral damage,” he said. “People were bailing out of Canada outright and looking for places to go short.”
The portfolio manager: John O’Connell, Davis Rea
The purchase: Walt Disney Co. (DIS-NYSE)
Last week, Disney trounced earnings estimates with a blowout quarter, which the market seemed to ignore entirely. Instead, investors continued to fixate on potential subscriber loss at ESPN as evidence of the decline of traditional cable and broadcast.
Disney shares opened the next morning down by 6.5 per cent. Mr. O’Connell took the opportunity to pick up the stock at less than $90 per share.
“Disney has a long time to go earning substantial revenues, and has a long time to reflect on the best way to capitalize on new technology,” he said.
Propelled by the runaway success of the latest Star Wars release, Disney’s first quarter included adjusted revenues of $1.63 a share on $15.2-billion of revenue. Profits rose by 28 per cent over the prior year.
But the company has been dogged by concerns about the future of ESPN, as viewers migrate toward online programming.
While the pressures on media companies such as Disney are real, the immediate threat is not necessarily fatal, Mr. O’Connell said.
“People are taking a straight line to zero in terms of cord-cutting,” he said. “I just find it hard to believe that a company this sophisticated in the distribution business will not be able to navigate through that.”
He said he picked up Disney shares at less than 16 times forward earnings, which is low historically, and attractive for “a premium quality company that is growing fast.”
The portfolio manager: Stephen Takacsy, Lester Asset Management
The purchase: Corus Entertainment Inc. (CJR.B-TSX)
Having owned Corus shares for nearly a decade, Mr. Takacsy was partly invested in the likelihood of a combination of Corus and Shaw Communications’ media assets.
That finally took shape in January, when Corus announced the $2.7-billion (Canadian) acquisition. But the market is undervaluing the deal, Mr. Takacsy said. “It makes them so much stronger. They’ve eliminated a competitor, basically.”
The deal finds Corus facing a variety of threats. The advertising market in traditional media has weakened, while changes to how cable and satellite products are bundled and priced in Canada could cost some Corus channels subscribers.
The general stock sell-off that has gripped markets this year hasn’t helped. And the increase in debt Corus is expected to take on as a result of the deal has some analysts concerned.
All told, Corus shares have declined by more than 60 per cent over the past 16 months.
“The market is overly discounting the uncertainty in terms of the future of broadcasting,” Mr. Takacsy said. “I think it’s going to be one of the top performers over the next 12 months.”
The cost synergies of $40-million to $50-million expected over the next two years are exceedingly conservative in both magnitude and timing, he said. And even without those savings, the stock’s valuation, at about 6.5 times earnings before interest, taxes, depreciation and amortization, is “ridiculously low,” Mr. Takacsy said. He participated in the company’s offering of subscription receipts at $9 a share announced days after the Shaw deal.