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:
Derek Warren, Morguard Financial
The buy: WP Glimcher Inc. (WPG-NYSE)
When U.S. real estate powerhouse Simon Property Group spun out this portfolio of Class B mall assets, Simon’s shareholders found themselves holding a new stock they likely didn’t understand and unloaded it as a result.
“I bet there’s still people who don’t know what it is and why they own it,” Mr. Warren said. “And they’re just bleeding it out.”
Shares of the spun-off entity, originally called Washington Prime Group, were distributed to Simon shareholders as a dividend about one year ago. The new REIT then merged with Glimcher Realty Trust, adding to the market’s confusion.
“There were just so many moving pieces – buildings coming in, buildings going out, then there’s a merger,” Mr. Warren said.
Until the most recent earnings report, there were no consolidated financials for the merged entity, and the stock has almost no analyst coverage.
So Mr. Warren built his own financial profile for the company based on pre-merger historical results, company presentations and conference call transcripts. “We were trying to take advantage of a lack of information flow,” he said. In that void, the stock was pushed down by about 30 per cent over the last year.
Mr. Warren said his model conservatively estimates the stock’s upside at 30 per cent. “It’s rare to find a $5-billion value stock in a sector as tight as real estate. But it does happen – often on a spin-out.” He wanted to buy the stock before the market had a chance to look at the company’s consolidated financials, which were released on May 7. He bought shares of WP Glimcher one day before at a cost of $14.90 per share.
The portfolio manager:
Paul Gardner, Avenue Investment Management
The buy: Yellow Pages Ltd. subordinated unsecured exchangeable debentures due in 2022.
These debentures may not be effectively “subordinated” to more senior debt for very long.
Yellow Media is rapidly paying down debt, such that it’s on pace to eliminate its senior notes within a few years. “There will be no one left above me,” Mr. Gardner said.
Investors are undervaluing both the underlying business, and these debentures in particular, which have a coupon of 8 per cent and which yield more than 400 basis points above Bank of Canada benchmark yields, Mr. Gardner said.
This company has made some progress in its transition from print to digital, but the competitive environment is challenging, and Yellow’s stock is still very much a speculative one.
“I don’t trust the business enough to give them equity money,” he said. “That’s a hope trade. You’ve got to hope it works out.”
But Yellow Media is generating significant free cash flow – $140-million last year – most of which goes toward paying off senior secured notes. The company’s business has stabilized enough that it should make enough cash to pay off the remaining $400-million of those notes relatively quickly, Mr. Gardner said.
In early April, he bought the subordinate convertible debentures. “I’m not looking for home runs,” Mr. Gardner said. “Pay me my 6 or 7 per cent, and if you happen to do well, I get free upside.”
He notes that the bid-offer spread can be wide with these notes, so prospective investors should wait for their price.
The portfolio manager:
Don Walker, Norrep Capital Management
The buy: PFB Corp. (PFB-TSX)
One of the surest ways to profit from the oil crash is to look for companies that will save money on input costs.
PFB, which makes resin-based insulation products, uses a derivative of oil as its main ingredient.
“I realized how much exposure they have to the falling oil price,” Mr. Walker said. “They’re going to have significant earnings momentum.”
Investors failed to register the same enthusiasm, trading down the stock by 35 per cent between last April and November, as the price of oil was plunging. Having reached its lowest share price since the financial crisis more than five years ago, PFB’s stock rallied, but not to the extent its rising fortunes warrant, Mr. Walker said. He said he suspects that investors tired of this stock, which was hit hard when oil prices were high. “Everyone was looking back. No one was looking forward.”
The stock traded as high as about $14 back in late 2005, when West Texas intermediate was sitting at about $60 (U.S.) per barrel, just like today.
“I think profitability should match those periods, looking at where oil is today. And they’re a bigger company today, too,” Mr. Walker said. “As the profitability comes, it’s just going to get rediscovered.”
He first bought two blocks of 200,000 PFB shares in January at about $4.50, then topped up on his position at about $6 per share after the company reported earnings two weeks ago.