James Hodgins is chief investment officer at Curvature Hedge Strategies. His focus is on market-neutral investing; small and mid-cap stocks.
Corby Distilleries Ltd.
Corby's asset-light business model is delivering very strong cash flow ROI, which is leading to significant dividend growth, including a 54-cent special dividend this month. The company is significantly under-levered with more than $100-million of idle net cash. Rumoured acquisition of Jose Cuervo distribution rights would be a highly accretive use of this excess cash. Our one-year target is $22.
The recent acquisition of CGA Gold will double production in 2013. It was an all-stock deal so, as risk-arb selling lifts, it creates an attractive entry point. Gold equities will rally on the back of increased quantitative easing (QE) in the U.S., Japan and, ultimately, Europe. B2Gold is our top pick in the sector, with a one-year target of $5.
Short Canadian housing: Home Capital Group Inc., MCAN Mortgage Corp., and Genworth MI Canada Inc.
We believe Canadian housing prices have peaked and will fall back to a long-term trendline over the next 24-36 months. This would imply a roughly 20- to 30-per-cent broad decline, which would likely impair both the earnings and solvency of our housing/mortgage basket.
Past picks: Dec. 29, 2011
Amaya Gaming Group
Total return: +98 per cent
Short: Home Capital Group Inc.
Total return: –21.83 per cent
Tax-loss selling buy basket
To be held for three weeks: Estrella, Sandstorm Energy & Metals Ltd., Swisher Hygiene Inc. Oversold small caps tend to bounce hard at year end and into January. We are looking for a 15-20 per cent potential three-week return for this basket.
Total return: –24.19 per cent
Total return average: 17.33 per cent
QE programs in the U.S., Japan and elsewhere are temporarily softening the continuing impact of the de-leveraging process from the global credit bubble. We continue to expect change-based market-neutral strategies to perform well in this difficult global environment for risk assets.
Specifically, we expect gold and gold equities to significantly outperform other financial assets in this environment. Now that the bubble appears to be bursting, we are looking for a 20- to 30-per-cent decline in Canadian residential real estate prices.