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: Martin Pelletier, portfolio manager and co-founder, TriVest Wealth Counsel
The purchase: SPDR Euro Stoxx 50 ETF (FEZ-NYSE)
Investors disinclined to fight central bankers may find Europe to be a more welcoming venue than the United States.
With the recent launch of a €1.1-trillion quantitative-easing program, the European Central Bank has resorted to the same kind of monetary stimulus the U.S. Federal Reserve recently wrapped up, luring investors who chase equity returns from central bank bond buying.
“It will continue to be the beneficiary of capital out of the U.S,” Mr. Pelletier said. “We’re pretty bullish on the European markets.” European stocks currently offer a compelling entry point trading in the range of 16-times forward earnings, compared to an average of 18-times for S&P 500 stocks, he said.
The drama surrounding Greece has helped suppress European stock values, he said. “It also doesn’t hurt that Europe is benefiting from low oil prices and a declining euro, which should help boost their economic outlook.”
The SPDR Euro Stoxx 50 ETF is made up of Europe’s largest 50 companies trading on the New York Stock Exchange. The fund is concentrated in France, Germany and Spain and has good balance between sectors, he said.
But to avoid the loss from converting weak Canadian dollars to U.S., Mr. Pelletier employed an options strategy – pairing puts and calls to neutralize the currency effect, while doubling the upside exposure.
“This allows you to synthetically generate a return on that market without having to do that conversion,” he said. “It’s an asymmetrical payoff profile.”
He first executed the trade in April, as the ECB wrapped up its first month of bond purchases, then added to his position last week.
The pro: Barry Schwartz, chief investment officer, Baskin Wealth Management
The purchase: TMX Group Ltd. (X-TSX)
Already contending with a rise in competitive threats, the operator of the Toronto Stock Exchange was doubly hit by the global oil rout.
As the plunge in oil prices gouged the Canadian energy sector, this stock fell by 23.9 per cent between June and February. “We’re in a slump,” Mr. Schwartz said. “But these things are cyclical. There will be a boom again and listings will pick up.”
In the meantime, the company continues to generate substantial cash, with a free cash flow yield of 9 per cent, and with limited need for capital expenditures.
He concedes, however, that the TMX “moat is eroding. And that will continue.”
The emergence of alternative exchanges such as Aequitas, which aims to capture 20 percent of the Canadian market, have weakened TMX’s grip on the market somewhat. But TMX still claims about a 75-per-cent market share, Mr. Schwartz said. Regardless, commodity weakness brought on a selloff that has TMX trading at a 30-per-cent discount to every other North American exchange, he said.
It should at least be trading on par, and has potential to establish a premium valuation, he said. The stock currently yields about 3.1 per cent, but the dividend hasn’t been raised in years.
He bought an initial block for Baskin’s clients in April with the stock trading below the $54 mark, and continued to accumulate over the ensuing weeks. “I think it’s a wonderful purchase all the way up to $60,” he said. “Looking out five to 10 years from now, I see a gushing of free cash flow, and I’m excited about what the company is going to be doing with it.”
The pro: Ryan Bushell, portfolio manager, Leon Frazer
The purchase: AutoCanada Inc. (ACQ-TSX)
While not an energy company, AutoCanada knows what it’s like to be treated like one.
Once much-hyped for its torrid growth buying up auto dealerships, AutoCanada’s stock dropped by 66 per cent from peak to trough as a casualty of the oil crash.
The company was punished for its concentration in Western Canada, and fears for the Alberta economy had a disproportionate effect on the company’s share price, Mr. Bushell said.
Running a conservative portfolio, AutoCanada is at the riskier end of the firm’s preferences, he said. “But we just thought the opportunity was too good based on short-term concerns in Alberta.”
It also helped that AutoCanada’s stock is yielding about 2.5 per cent, while dividends have increased by 80 per cent over the past three years.
While geographic concentration is a valid concern, AutoCanada has made some progress in diversifying to other regions. And a decent portion of the company’s profits come from servicing and parts, which tend to be more resilient than auto sales in economic pullbacks, Mr. Bushell said.
“As long as Albertans don’t stop driving, they don’t need to be buying new cars every year, the business will be okay.” That demand, as well as continued growth through acquisitions, should combine into a strong tailwind, Mr. Bushell said.
He established a position in February, then tripled the stake in April at an average purchase price of $41. That’s roughly where the stock is trading today, down from an intraday peak of $92 in last June, reflecting the investors’ skepticism.
“They have to show they’re going to be able to go through this downturn, and be profitable through it,” Mr. Bushell said. “We think they will.”