Jerome Hass is portfolio manager at Lightwater Partners. His focus is on Canadian mid-caps and long-short strategies.
Top Picks:
*Short* Sphere 3D (ANY-Nasdaq)
We added to our position on January 26 2015 at $4.20
We have been following this name from its pre-IPO days in the autumn of 2012. Their 'virtualization technology' is supposed to enable access to fully-featured applications from any mobile device. Unfortunately, customers have not been buying the product – there have been no major buyers to date. Moreover, its merger with related-party Overland Storage is a 'perplexing' transaction in many respects.
Pair Trade
*Long* Guardian Cap. (GCG.A-TSX) / *Short* Bank of Montreal (BMO-TSX)
We added to both positions Feb.9, 2015 at $17.03 for GCG.A and $77.77 for BMO
Guardian holds about 4.7-million shares of the Bank of Montreal and other investment securities which are worth a total of $16.75 per Guardian share (as of 30 Sept) vs. a $16.63 current share price (100 per cent of share value). If you strip out the value of its investment portfolio, the underlying business – which has been robust over the last few years – is a free option. Guardian is an attractive take-out target; there are few independent asset managers of its size. One morning we will wake up to read about such a bid; in the interim we hedge our position by shorting BMO common shares against it.
*Long* NYX Gaming (NYX-TSX-Venture)
We bought NYX in the IPO on Dec.30 2014 at $3.50
We view NYX as a less 'crowded' way to play the gaming sector. It IPO'd on 30 December, 2014, so not too many investors were around to pay attention. With over 100 clients and over 330 games, there is little game-specific or casino-specific risk involved. NYX has a 'right of first refusal' on the back-end segment of any acquisitions made by its corporate 'cousins' Amaya Gaming and Intertain Group. This could add significant growth to NYX this year.
Past Picks: April 16, 2014
Veeva Systems (VEEV-NYSE)
Then: $22.63; Now: $30.05 +32.79%; Total return: +32.79%
Currency Exchange International (CXI-TSX)
Then: $12.70; Now: $26.12 +105.63%; Total return: +105.63%
Pair Trade:
*Long* Guardian Capital (GCG.A-TSX)
Then: $17.20; Now: $16.86 -1.98%; Total return: -0.87%
*Short* Bank of Montreal (BMO-TSX)
Then: $76.08; Now: $77.81 -2.27%; Total return: -6.40%
Total return average: +43.72%
Disclosure: | Personal | Family | Portfolio/Fund |
VEEV | N | N | Y |
CXI | Y | Y | Y |
GCG.A | N | Y | Y |
BMO | Y | Y | Y |
Market outlook:
We are constantly asked for our forecasts on the stock market, on the Canadian dollar, or on interest rates. Our answer is inevitably the same: we have none. In the short-term, we believe the direction of the market cannot be forecast on a consistent basis. It is what statisticians refer to as "a random walk". As stock-pickers, we prefer to spend our time analyzing individual companies especially those that are under-researched and under-owned by investors, which we call "uncrowded' trades. If we do our job, this approach should be able to yield results regardless of the direction of markets.
In choppy markets, one way that we dampen volatility in our portfolio is through the use of pair trading. By going 'long' in one stock and selling 'short' another stock in a similar industry, we can hedge out market risk (the risk that the market rises or falls) and industry-specific risk (factors such as fuel prices, weather, currency movements, etc.). The key aspect of pair trading is not whether in absolute terms the two stocks move up or down – it is how they move relative to each other. For example, in a falling market both stocks may decline in value but if a short position drops more than the long position, the pair trade will make money. Thus, pair trading helps to reduce volatility and enhances diversification of a portfolio.
There may be a particular catalyst that causes one side of the trade to react differently from the other or it may simply be a case of differences in valuation that are likely to converge over time. Figuring out how they will react to future events is the tricky part – that's where we can differentiate ourselves from our peers and long-only investors.