James Hodgins is president and chief investment officer of Curvature Hedge Strategies. His focus is market-neutral investing (small-mid cap stocks).
Equity Financial Holdings Inc. (EQI-TSX)
This is a very cheap turnaround story with new management and deep pockets behind it. It trades at 1x Book Value vs. peers Equitable or Home Capital which are 2x-3x Book. As management ramps the ROE of its loan portfolio that valuation gap with normalize. Management is also highly cautious on the housing market and is very strict in its lending practices. 1 year target is $18.50 or 2x Book.
Easyhome Ltd. (EH-TSX)
Easyhome is the fastest growing financial company in Canada. It recently lowered its cost of capital from 10 per cent to 7 per cent adding significantly to gross margins. It also benefits from demise of Cash Store Financial. Easyhome trades at 11X earnings vs. other growth financial peers at 17x. Our 1 year target is $25 but we see the market for their lending book ultimate close to $1-billion, implying targets well north of $50/share in 3-5 years.
Leucrotta Exploration Inc. (LXE-TSX Venture)
Leucrotta recently bought 10 Montney block in a B.C. land sale, contiguous to existing land. ARC Resources (ARX-TSX) is aggressively bidding on nearby blocks indicating the value of these assets. LXE had a rushed well fail while drilling, but we see this as a short-term hiccup. We note that they bought the nearby blocks after this drilling failure, saw enough data to buy it. We believe the company is very well positioned as it has no debt, lots of cash as well as other capital sources and a highly prolific BC Montney package.
Past Picks: December 27, 2013
Axia NetMedia (AXX-TSX)
Then: $2.49; Now: $3.22 +29.32%; Total return: +31.82%
Painted Pony Petroleum (PPY-TSX)
Then: $6.57 Now: $9.58 +45.81% Total return: +45.81%
Merus Labs International (MSL-TSX)
Then: $1.44; Now: $1.88 +30.56%; Total return: +30.46%
Total return average: +36.03%
The Santa rally is on, and with the end of tax-loss selling season at hand, we expect a strong bounce in the junior resource space over the next month. That said, broader valuation measures remain stretched and we think the volatility in various asset classes will spill into equities at some point in 2015.