John Wilson is CEO, co-chief investment officer and senior portfolio manager at Sprott Asset Management. His focus is on North American large caps.
Element Financial (EFN-TSX)
Macro risk: significant recession in the U.S. meaningfully increases loan losses on earning assets.
Initiated: June 27, 2013
1. Post the transformative PHH Arval Acquisition (Fleet), the company is uniquely positioned to meaningfully grow EPS, CF, and improve ROA/ROE. Expect high EPS growth – 30%+ in 2016. Expect a low cash tax rate due to long-lived rail assets (continued relationship with Trinity).
2. Should get a second investment grade rating this summer, which should further lower funding costs.
Recent news: The company appointed a new chairman (William Lovatt is retiring as CFO of Great West), which separates CEO from chairman position (a good governance signal).
Downside risk: Slowing economic growth reduces opportunities for organic growth as businesses slow fleet additions.
Hudson's Bay Company (HBC-TSX)
Macro risk: The rapid rise in interest rates to historic norms lowers the implied value of HBC real estate holdings.
Initiated: September 5, 2013
1) Using the $9.2-billion estimate for the real estate as a base and assuming a conservative EBITDA multiple on our expectations for the retail business in 2015, we can get a valuation into the mid $30s for the company.
2) Management seems interested in continuing to look for stranded real estate assets in other retailers which could lead to further real estate upside as well as deal synergies with the acquired retail business.
3) There are some concerns about weaker shopping trends for the high end of the market due to weakness in emerging market tourists to New York. This might impact sales and margins at the flagship. We see currency translation benefits in 2015 likely offsetting some of this risk.
4) With the real estate valuation now a considerable portion of the value of the company, expect more sensitivity going forward to long-term interest rates.
Recent news: Recently announced formation of JVs with Simon Properties and RioCan for real estate assets.
Downside risk: Economic downturn and reduced consumer spending impair retail shopping trends and HBC/Saks stores.
Macro risk: Major move higher in US$ relative to the euro reduces value of significant EU earnings.
Initiated: November 6, 2013
1) Acquisition of Hospira gives more credibility to the break up thesis, a large portfolio of biosimilars and EPS accretion and growth in the next couple of years (which was low because of some drugs going off patent).
2) Ibrance (palbociclib), a new breast cancer drug, has recently been approved by the FDA. The Street see this as a $5-to-7-billion+ (peak) drug.
3) Still sitting on a large cash pile, gives them lots of optionality. This management team has shown they are disciplined with our capital.
Recent news: The company announces acquisition of Hospira for $17-billion.
Downside risks: Poor testing results impair progress of pending approvals for new drugs.
Past Picks: February 11, 2014
CGI Group (GIB.A-TSX)
Then: $34.32; Now: $53.41 +55.62%; Total return: +55.62%
General Motors (GM-NYSE)
Then: $35.25; Now: $37.39 +6.07%; Total return: +10.73%
Baytex Energy (BTE-TSX)
Then: $40.40; Now: $19.48 -51.78%; Total return: -48.26%
Total return average: +6.03%
Expect the overall pace of U.S. economic growth to stay relatively healthy in 2015 and re-accelerate following a relatively slow Q1, reigniting speculation over Fed rate increase mid-year.
Risk in the Canadian economy remains to the downside in our view: energy collapse hits hard in Alberta and Saskatchewan, weak EM weighs on commodities; the levered consumer will slow credit growth equity market.
Equity market volatility will remain elevated relative to the past few years as uncertainty remains elevated over pace and timing of Fed rate move and the Greece/Eurozone drama.
Expect increased dispersion of returns among both sectors and stocks.