Daniel Lloyd, founder and portfolio manager at Sui Generis Investment Partners

Focus: Canadian equities
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MARKET OUTLOOK
It’s an exciting time to be doing what we do as opportunities abound while investors are still enraptured by the idea that U.S. President Donald Trump will implement “huge” tax cuts, cut regulation and boost spending on enormous infrastructure programs. While “animal spirits” have taken stocks materially higher since the election, the realities of governing are becoming more apparent by the day and equities are still priced to near-perfection. Valuations are very expensive, retail money has come flooding into equities, margin debt continues to hit all-time highs and the short interest in stock is at all-time lows. The contrarian in us wants to short this market right now. However, at the moment we are comfortable running market neutral until there is some follow-through on some of the cracks that have started to emerge. We would encourage investors to play it safe for the time being as the opportunities we mentioned earlier are almost entirely on the short side.

TOP PICKS

SHORT: EXCHANGE INCOME CORPORATION (EIF.TO)
Exchange Income operates a group of small airlines, an aviation leasing business and several small manufacturing businesses. Our issue with Exchange Income Corporation is not necessarily that the businesses they operate are run horribly, but rather that we believe they have completely mismanaged their capital structure. The company does not generate enough cash from operations to cover their total capital expenditures, let alone fund their dividend or cover their interest costs. This is what we call an “access to capital” story in that as long as they can keep raising money via equity or convertible debenture issuances, the company can continue along its current path. However, if equity markets were to become closed off, EIF will have to make some very hard decisions about capital allocation.

LONG: PAREX RESOURCES (PXT.TO)
Best in-class management team, assets, cash flow and balance sheet, all at a very reasonable six times cash flow. Parex should grow production about 20 per cent this year to about 35,000 barrels/day, and it has recently been growing reserves in their core plays while putting up industry-leading cash flow numbers. The company has net cash on the balance sheet and should generate free cash flow in 2017 at current oil prices. We don’t believe there should be an aversion to investing in a Colombian-focused oil company, and Parex is as good as it gets.

SHORT: THOMSON REUTERS (TRI.TO)
Thomson offers a second-tier product to financial institutions who are looking to cut costs any way they can. The entire financial services industry is being disrupted and Thomson’s sales in their financial division correlate closely to actively managed mutual fund AUM, something that continues to decline amid the rise of passive investing and ETFs. Rising interest rates should provide a headwind to TRI’s expensive valuation as the stock has been used as a bond surrogate for its dividend in this low rate environment. But 25x consensus GAAP earnings for a company with declining or at best flat sales is just too much.
  

PAST PICKS: JULY 5, 2017

ZCL COMPOSITES (ZCL.TO)

• Then: $9.04
• Now: $13.29
• Return: +47.01%
• TR: +48.99%

SHORT: CI FINANCIAL (CIX.TO)

• Then: $26.77
• Now: $27.02
• Return: -0.93%
• TR: -4.50%

PAIR TRADE:

• LONG: SECURE ENERGY SERVICES (SES.TO)
  • Then: $8.54
  • Now: $9.85
  • Return: +15.33%
  • TR: +17.33%
     
• SHORT: PRECISION DRILLING (PD.TO)
  • Then: $6.76
  • Now: $5.96
  • Return: +11.83%
  • TR: +11.83%

TOTAL RETURN AVERAGE: +24.55%
 

WEBSITE: www.sgip.ca