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 pro: Gordon Reid, president and chief executive officer of Goodreid Investment Counsel
The purchase: Verizon Communications Inc. (VZ-NYSE)
Verizon’s stock has spent more than two years bouncing around the $50 (U.S.) mark, lacking the growth profile required to excite investors in a bull market.
Recently, investors preparing for an eventual rise in interest rates have traded down the telco’s shares, which would have diminished appeal when bond yields rise.
That sentiment fails to appreciate the company’s transition from a defensive income name to more of a technology company with high growth prospects, Mr. Reid said. “Verizon is becoming something that people haven’t yet recognized.That’s going to lead to a stronger growth profile, and a changing investor view that will recalibrate the multiple people are willing to pay.”
The entire telco industry, of course, is moving toward the delivery of mobile content. On that front, Verizon is an industry leader, Mr. Reid said. Its capital expenditures exceed $25-billion per year. And the recent $4.4-billion deal to acquire AOL provides a platform for Verizon’s mobile-focused video service.
JPMorgan Chase disagreed, downgrading Verizon in favour of AT&T in early June, sparking a slide in Verizon shares.
Trading at about 6 per cent lower than its May peak, the stock became an attractive purchase at just below the $48-mark last week, Mr. Reid said. “It has the potential to be a double-digit grower for a number of years.”
The pro: Greg Newman, senior wealth adviser at Newman Group, a ScotiaMcLeod affiliate
The purchase: Hudson’s Bay Co. (HBC-TSX)
The turnaround story that has resulted in a near-doubling of the share price hit a snag over the past couple of months.
Drifting lower since April, Hudson’s Bay posted a quarterly loss on June 10 that more than tripled analysts’ forecasts. The investor reaction was not drastic, but it was negative, extending the stock’s losses to about 20 per cent in just over two months.
“On that day, I thought: ‘This has got to be a buy here,’” Mr. Newman said. “Then I got a little lucky.”
The next Monday, the company announced a $3.9-billion (Canadian) deal to buy German department store chain Galeria Kaufhof. The stock has since shot to new highs.
To be fair, a potential acquisition was part of the rationale for buying HBC shares, Mr. Newman said. But primarily, he saw promise in the retailer’s quarterly figures. HBC generated same-store sales growth of 2.7 per cent, after excluding the effect of a higher U.S. dollar on sales figures. “In my view, the biggest hit of the dollar rise is probably behind us,” Mr. Newman said.
In addition to value from acquisitions, he said he perceives two main contributors to growth for HBC: improvements to existing stores and extracting value from real estate.
“I just thought there was too much negativity for a name that we’re modelling as growing [profits] by 36 per cent over the next two years,” he said. He bought the stock on June 11 at a share price of $23.02.
The pro: Peter Brieger, chairman and managing director, GlobeInvest Capital Management
The purchase: Agrium Inc. (AGU-TSX)
Agricultural bulls have long relied on some powerful long-term trends in global demographics to support investments in fertilizer stocks.
Population growth and rising incomes in emerging markets will bring about changes to diet and increases in global food demand, ensuring a growing need for fertilizer, the argument goes.
“We thought it was a no-brainer,” Mr. Brieger said. “It wasn’t.”
The fertilizer market proved to be more cyclical and volatile than he expected, struck as it was by a number of setbacks, including the deceleration of the Chinese economy.
As a result, fertilizer stocks, including Agrium, have mostly traded sideways over the past couple of years. But the stock started this year strong, spurred on by the accumulation of a large position in Agrium by activist investor ValueAct Capital.
Mr. Brieger said the long-term trends supporting Agrium’s future remain potent, despite the volatility. When the stock does dip substantially, he said he tends to take the opportunity to top up.
He remains encouraged by the company’s history of dividend increases, and the likelihood of building on that record.
He said Agrium is expected to generate $11 a share of free cash flow by 2017. Assuming the dividend payout ratio could be increased to as high 50 per cent, annual dividends could reach $5.50 per share. That represents a potential 45-per-cent increase from current levels.
So when the stock pulled back from its early-year rally, declining by 13 per cent since its March peak, Mr. Brieger took the opportunity to build his holdings at a share price of $127.68 on June 10.