It's not easy to be a stock analyst ferreting out big winners, but many did so amid last year's stomach-churning, roller-coaster ride in the markets.
Against the backdrop of a global credit crisis, markets plunged early last year before bottoming out in March, and then snapping back. The S&P/TSX composite index, which fell 35 per cent in 2008, rebounded by 30.7 per cent in 2009, ending the year 55.2 per cent above its March low.
"It was a difficult year," recalls M Partners Inc. analyst Michael Krestell, who covers retail among other sectors and is one of the top 10 Canadian top stock pickers in the Thomson Reuters StarMine analyst awards. "Many [retail] companies were really hit by the pullback in discretionary spending."
Last year he put "buy" ratings on companies that were reacting quickly to preserve cash, such as cutting distributions, and paring expenses in the face of an economic downturn. "Even in the absence of sales growth, profitability stabilized and then improved," he said. "The result was higher share prices."
Mr. Krestell, who held finance and operations jobs in the retail and food service industry before becoming an analyst at M Partners in 2005, found winners in smaller-cap stocks hit hard by a "flight to liquidity or perceived safety."
He had a "buy" last year on Sterling Shoe Income Fund, a shoe retailer that surged 169 per cent. The income trust's units traded in the range of $18 to $19 in 2007, but sank to a low of 86 cents in December, 2008. "We saw an opportunity to buy a company that had expanded with more stores and had a greater presence, but was trading at a severe discount to where it was in the past," Mr. Krestell said
The StarMine awards, which were handed out in Toronto Tuesday night, recognize analysts in several categories. In addition to the 10 top stock pickers, awards were given to 10 analysts for being tops in earnings estimate accuracy. Others were honoured for stock picking and earnings estimate accuracy in different industry sectors.
TD Securities Inc. was the No. 1 broker, taking in 18 awards. BMO Nesbitt Burns Inc. and RBC Dominion Securities Inc. tied for second with 11 each, and CIBC World Markets Inc. came third with 9.
Among the top stock pickers, Alan Knowles of Haywood Securities Inc. was ranked No. 1, while Rafi Khouri of Raymond James was No. 2 and Kris Thompson of National Bank Financial came third. Check Globe Investor through the rest of the week for articles profiling each analyst.
Mr. Krestell, who was ranked No. 4 among the top stock pickers, expects that drilling down into specific companies will be more important this year in picking winners as opposed to making sector bets.
For example, he has a "buy" on Brick Brewing Co. Ltd. with a target of $1.35. "We think they are nearing successful completion of a turnaround, and about to embark on a strategy to build sales," he said. And he rates residential landlord Killam Properties Inc. a "buy" with a target of $9.60 a share. This stock, with its 6.7 per cent dividend yield, is a "great defensive name with growth opportunities," he said.
Sam Damiani of TD Securities - who covers real estate and ranked No. 7 among the top stock pickers - echoed the difficulty in navigating through 2009 given the market volatility. His winners last year included BPO Properties, which gained a hefty 142 per cent.
The rapidly weakening economy and all-but-frozen capital markets shook everyone's confidence from late 2008 to early 2009, Mr. Damiani said. "On the other hand, valuations had fallen by so much. … You just knew that once the corner turned that there would be significant upside, and of course that is exactly what happened. We won't see returns like that in the real estate sector for some time."
BMO Nesbitt Burns analyst John Reucassel, who was chosen the No. 1 analyst in the industry stock picking awards for the insurance sector, agreed that 2009 was a tough year because firms he covered had to shore up reserves and capital levels as equity markets went down. "Insurers were under a lot of pressure," he said.
Mr. Reucassel ended up recommending insurers with the "least amount of equity and credit exposure" in 2009. His "buy" ratings on stocks like Industrial Alliance Insurance, which gained 38 per cent last year, and Great-West Lifeco Inc., which rose 30 per cent, worked out well.
Mr. Reucassel, who now covers banks and asset managers after handing insurance to another analyst, now recommends names such as Toronto-Dominion Bank, National Bank of Canada, Royal Bank of Canada and IGM Financial Inc. When it comes to stock picking, "it's always good to be lucky too," he quipped.
Full lists of all the StarMine best analysts of 2009