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bnn market call

Eric Nuttall is portfolio manager at Sprott Asset Management. His focus is oil & gas stocks & small-cap Canadian equities.

Top Picks:

Northern Blizzard (NBZ.TO)

NBZ is one of the few oil stocks that is NOT discounting a recovery in the oil price. Using $55/bbl (U.S.) in 2016 the stock trades at 4.7X EV/CF despite having a good hedge position (56 per cent of their oil at $79.50) and a decent balance sheet (1.8X D/CF). The stocks yields 9.5 per cent despite a 50-per-cent dividend cut months ago that realigned capex+dividend with their cash flow. As oil recovers into next year the stock could rally to $7-8/share which would still be down over 50 per cent from its level a year ago.

NYX Gaming (NYX.V)

NYX is the 3 largest online poker software provider to all of the world's major online gambling sites. The company has low leverage, high recurring revenue (90 per cent), high inside ownership (35 per cent), and is aiming to organically grow revenue by over 30 per cent in 2016 (plus potential acquisitions). The stock trades at 12X consensus earnings but could be trading as low as 7X earnings if management is able to hit their margin targets.

Air Canada (AC.TO)

This is not the same company as it was last cycle!  AC has been successful at fixing their pension deficit ($4-billion deficit gone), securing a positive labour deal with their unions, and revitalizing their fleet with more fuel efficient and higher density seating. The company continues to deleverage its balance sheet from 4.4X D/EBITDA a few years ago to 2.8X exiting 2015 to 2.2X exiting 2016. Despite a very positive turnaround story the stock trades at 3.2X earnings which is a 1X -2X discount.  Consensus price targets is $18.80. Even a more modest $14 target (4X earnings) would = 27% upside on a stock that has fallen 25% from its high of 5 months ago.

Disclosure:

Personal

Family

Portfolio/Fund

NBZ

Y

N

Y

NYX

N

N

Y

AC

N

N

Y

Past Picks:  August 25, 2014

Ikkuma Resources (IKM.V)

* Formerly - PanTerra Resources (PRC.V) (name change on Sept 22, 2014)

** PRICE ADJUSTED

Past comments: A brand new recap led by the former technical team of Manitok, PanTerra has amassed a good starter package in the Foot hills of Alberta.  With the recent sell-off PRC now trades below their natural gas peers, yet will likely have top quartile production growth in 2015.

Then: $0.33; Now: $0.63; -80.91%; TR: -80.91%

Tourmaline Oil (TOU.TO)

Past Comments: Once TOU formalizes their drilling plans for 2015 this fall, I expect consensus expectations for production and cash flow to rise, revealing that TOU trades at a cheaper forward multiple than what the market currently believes. My short-term target is $60 with an eventual path to beyond $75/share. This is a core long-term energy holding.

Then: $54.10; Now: $28.76; -46.84%; TR: -46.84%

CASH

Total Return Average: -42.58%

Disclosure:

Personal

Family

Portfolio/Fund

PRC

N

N

N

TOU

N

N

N

Market outlook:

The energy sector has rallied strongly on anticipation of a rebalancing of the global oil surplus through very strong demand (highest rate of growth since the Great Recession) and an implosion in spending both in the U.S. and in the rest of the world. (The worst drop in 24 years; 2016 will be the first three-year sequential decline in capex in the history of the oil and gas sector.) The challenge, though, is that most oil stocks are already discounting a recovery with some being valued using an oil price in excess of $60/bbl. The trick then is to identify stocks that are still undervalued but not necessarily "cheap" as cheap stock are usually as such for a reason.

In small cap land, what started out as a fantastic year has for many become a year of misery. Every sector (other than energy) now seems to be better for sale with noted pain in the health care space. We continue to find opportunities in this environment as some stocks have fallen due to overall poor market conditions rather than any change in their business fundamentals. With each negative day more stocks have swung from fully valued to now attractively valued, and we have been putting a large part of our cash position to work.

Editor's note: Due to an editing error, an earlier version of this article contained outdated stock picks. This version has been corrected.