Brad Cutsey credits his stint as a waiter in high school for taking him on a Bay Street journey that has won him recognition as Canada's top stock picker in 2011.
Working part-time in an upscale restaurant at a ski resort just north of Toronto, the Barrie, Ont.-native recalls being intrigued by customers who gave the "highest tips" and would spend $200 or $300 on a bottle of wine.
"I gravitated to a career that I thought could afford the same kind of lifestyle," quipped the 39-year-old real estate analyst at Dundee Securities Corp. "The people who could afford the big bills tended to come from Toronto on vacation, and worked in the finance industry."
But he also discovered he liked the business, and trying to be ahead of the crowd on his calls. For 2011, his stock picks garnered a better return than his benchmark versus his peers, and pushed him into No. 1 spot in this year's StarMine Analyst Awards.
StarMine, a unit of Thomson Reuters Corp., measures the performance of equity analysts based on the returns of their buy and sell recommendations, and also accuracy of their earnings estimates. The annual awards identify the top 10 individual performances for each category.
Mr. Cutsey earned a bachelor of business administration (BBA) in finance and economics from Bishop's University in Quebec before his move to the Street. He began his career at TD Securities Inc. before joining Blackmont Capital Inc. (now Stonecap Securities Inc.), and then Dundee Securities in 2007.
His best call last year was changing his "sell" rating for InterRent Real Estate Investment Trust to a "buy" on March 29, 2011, after the apartment operator kept beating his expectations. The REIT shot up 102 per cent to $3.16 a unit by Dec. 17, 2011. It closed Tuesday at $4.39 a unit.
"It's the first time I had ever gone from a sell to a buy without going to a neutral [middle rating]first," he said. "I had a lot of conviction in it." It was a "show me" story, and management demonstrated it could improve its portfolio of apartments by doing everything from installing new boilers to improving landscaping and then raising rents, he said.
His "buy" on Mainstreet Equity Corp., another apartment operator, was also a good call. Its stock, which climbed 61 per cent to $23.99 a share in 2011, closed Tuesday at $27.76. Management has "done an excellent job of buying smart" and improving the buildings to boost rents, he said.
While there have been several takeovers in the REIT sector recently, he doesn't expect more this year. "But if there is merger-and-acquisition activity, it would [probably]be in the multifamily or apartment space, and the more likely buyer would be pension funds," he said.
With the strong runup in real estate stocks and trusts since the 2008 market downturn and its continuation this year, Mr. Cutsey has become "less bullish" on the sector. Although he had projected a 15-per-cent total return for the S&P/TSX Capped Real Estate Index this year, he expects that figure will be surpassed.
The two wild cards that could derail the sector is investor sentiment turning toward growth stocks if equity markets improve, or a significant increase in interest rates that could make alternative securities more attractive, he said.
Both scenarios, he suggested, are unlikely. He doesn't expect investor sentiment to change until there is some resolution to the continuing euro zone debt crisis and the U.S. presidential election in November. He also doesn't see a major interest rate hike over the next year.
"If we are still in the same kind of [volatile stock]environment, I would still expect REITs to at least provide a double-digit return – albeit on the lower side" next year, he said. "If there is positive sentiment in the equity markets, you could get a scenario where your capital appreciation on the stocks is limited."
Looking ahead, investors have to be more selective in the real estate sector now that the larger-cap securities have had a nice run, he said. "My top picks now tend to be small-cap REITs or real estate companies … As they continue to outperform and post solid year-over-year returns, people are going to go down the food chain looking for the smaller caps in the hopes of extra return."
Brad Cutsey's top stock picks
Pure Industrial Real Estate Trust
Management has "done a good job" of growing Canada's only pure industrial-focused real estate investment trust, says top stock picker Brad Cutsey. "They have met or surpassed my earnings forecast every single quarter, but one since February, 2008." His one-year target is $5.50 a unit.
InterRent has executed well in upgrading its apartment buildings, but it is now entering a "growth phase," he said. The REIT, which trades at a discount to an estimated net asset value of $4.95 a unit, will acquire more properties and do the more of the same, he suggested. His 12-month target is $5 a unit.
Allied Properties REIT
This office-property REIT is run by a strong management team, but it's a story that should play out over the next few years, Mr. Cutsey said. The leasing problems at Allied's Cité Multimédia property in Montreal are over, and "it should be a significant driver of cash flow growth in the near term," he added. His one-year target is $29.50 a share.