Jerome Hass is portfolio manager at Lightwater Partners. His focus is Canadian mid-large caps and long-short strategies.
*Short * Veeva Systems (VEEV-NYSE)
We started shorting Veeva at $30.67 (U.S.) on March 22, 2014, and have been adding to our positions since then. Veeva is a cloud-based customer relationship management (CRM) provider for the life sciences / health care industry. The two founders partnered with SalesForce.com creating what is essentially a specialized white label/CRM software app product using the SalesForce building blocks. Veeva pays 20 per cent of revenues to SalesForce.com.
Veeva is popular among investors because of the rarity of cloud companies to be profitable in the initial stages. The reason it is profitable is because its software platform uses all of SalesForce.com infrastructure so it has avoided the high upfront costs associated with building initial cloud server back end.
Veeva raised $217-million on Oct, 16, 2013 – the day of its IPO – to the company and about $80-million for investors. It originally had planned a range between $12-$14 but increased the price to $20 due to the demand. The stock rocketed up 85 per cent on the first day of trading to $37 (following other successful cloud IPO’s Workday and Rocket fuel which both traded 2X their opening price). 87.2-per-cent (or 109 million shares) previously locked up since the Oct. 16, 2013 IPO just became free trading April 14. This doesn’t include approximately 27 million (in the money) stock options.
The CEO/co-founder will be selling 1.35 million shares, and early investor VC firm 4.9 million shares. There is decelerating growth in their only successful business segment (95-per-cent of sales) to date targeting life sciences CRM solutions. There is already a high market share in CRM. Industry total addressable market in life sciences CRM is shrinking not growing due to Veeva’s aggressive pricing (it undercuts industry pricing by 40-60 per cent to win market share)
SalesForce just announced plans to expand into health care/life sciences. Hence, Veeva’s supplier and partner has just become its competitor as well. SalesForce can poach Veeva’s clients in health care, but as part of their agreement, Veeva can’t seek clients outside of health care.
Veeva is overvalued versus its peers or at the high-end of valuations.
Currency Exchange International (CXI TSX)
CXI is a wholesale provider of cash foreign exchange to banks, credit unions, retail stores. Its clients include some of the top six Canadian banks and large U.S. regional banks.
CXI is the “Davis & Henderson of foreign exchange.” In the same way that Davis & Henderson carved out a niche in Canadian banking by focusing on the very narrow niche of cheque printing, CXI is focused on foreign exchange. Banks can outsource it more cheaply and more profitably than they can do it themselves.
CXI is the #3 FX supplier in Canada and #4 in the U.S. (behind Bank of America, Wells Fargo, and Travelex). Bank of America has effectively 90 per cent of the wholesale FX market in Canada. We have held CXI since its IPO in March, 2012 at $6.65; we have recently bought around $12.60; we continue to accumulate the position.
CXI has applied for a Schedule A licence in Canada, which we expect will be awarded in late September / early October. Bank of Canada has a vested interest in promoting competition away from Bank of America near-monopoly.
CSX has a low-risk business model. It earns a margin on both buying and selling currencies. The firm’s proprietary software helps it keep net currency exposures balanced.
CXI trades at 10.0x PER 2014 with 20-per-cent EPS growth.
Pair: Long Guardian Capital (GCG.A TSX) / Short Bank of Montreal (BMO TSX)
Initiated the position in early 2009; it is one of our longest held pair trades. We added to both sides of the pair in December 2013.
Guardian Capital is an asset manager based in Toronto with about $18-billion assets under management (AUM) and $10 billion assets under administration (AUA). In 2001, Guardian sold its mutual fund business to Bank of Montreal in exchange for 5 million BMO shares, which Guardian still holds to this day. Guardian also holds other investment securities which are worth $14.25 per Guardian share or 85 per cent of the value of the share. If you strip out the value of its investment portfolio (=$16.64 - $14.25 = $2.39), the underlying business – which has been robust over the last few years – is priced at about 3x this year’s EPS. Guardian is an attractive take-out target; there are few independent asset managers of its size. One day we will wake up to read about such a bid; in the interim we hedge our position by shorting BMO common shares against it.
Past Picks: April 23, 2013
*Long* Mega Brands Warrants (MB.WT-TSX)
Sold on Feb. 28 at $0.39
Then: $0.24; Now: $0.39%; Total return: +63.00%
*Short* Mega Brands (MB-TSX)
Covered short on March 20 at $17.70
Then: $14.53; Now: $17.72 -19.73%; Total return: -19.73%
*Long* Pure Industrial REIT (AAR.UN-TSX)
Sold on Dec. 19 at $4.55
We sold AAR.UN; we have re-deployed our capital into another REIT: Boulevard Industrial REIT (BVD.UN), which is run by Scott Hayes, the ex-president of Pure Industrial REIT and the ex-CEO of Dundee Industrial REIT.
Then: $5.12; Now: $4.82 -5.86%; Total return: +0.70%
*Long* Tag Oil (TAO-TSX)
Then: $5.34; Now: $3.07 -42.51%; Total return: -42.51%
*Short* Imperial Oil (IMO-TSX)
Then: $39.18; Now: $52.01 -32.75%; Total return: -34.23%
Total Return Average: -5.34%
"Now" figures are intraday from the date of the analyst’s appearance on BNN Market Call.
On the surface, it would it appear to be steady as she goes for the TSX and its counterpart in the U.S., the S&P 500. With both indexes trading in the range of 15-16x 2014E EPS, they are well within the range of long-term historical trends. However, what is below the surface is somewhat disconcerting. We are finding extremely high valuations in some sectors (most notably U.S. technology) while the "real" economy is still producing attractive valuations. As a long-short manager, we see this as an incredible opportunity. We are taking advantage of some very compelling short ideas in the technology sector. While on the long side of the ledger, we have, and continue to, uncover real gems that will drive our performance into the second half of the year. A stock pickers market on both sides (long and short) suits our eye perfectly.
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