Daniel Lloyd, Founder & Portfolio Manager, Sui Generis Investment Partners
FOCUS: Canadian Equities
Our opinion regarding the direction of equity markets from here is little changed since our last appearance on Market Call, in that we are still cautious. Following the enthusiasm after the U.S. election, there now seems to be a divergence between “hard” and “soft” data, something that must reconcile itself rather soon. Our fund is currently being run market neutral as we do not believe reaching for equity exposure on the long side is warranted, while we also acknowledge that being aggressively short this market is a risky proposition given investors propensity to move on headlines alone. We are somewhat optimistic on oil pricing from this point forward and we believe some gold exposure is warranted, beyond this we think sticking with free cash flow focused names (regardless of their sector) will ultimately look like the smartest positioning for the balance of 2017.
*Short* Exchange Income Corp (EIF.TO)
The short thesis has gotten worse since we first recommended this as NorthWest Company, through their purchase of North Star Air has moved established themselves as a well-funded, legitimate competitor to EIF’s Manitoba and Northern Ontario based airlines, a geography where EIF has previously had a near monopoly. To refresh: Exchange Income operates a group of small airlines, an aviation leasing business and several small manufacturing businesses. We still believe EIF has completely mismanaged their capital structure and that the extremely high capital requirements in the aviation space do not gel with both debt and a dividend. To this point, on our numbers 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* Bellatrix Exploration (BXE.TO)
Bellatrix is a small natural gas focused turnaround story that is yet to be embraced or truly understood by the street. We believe that the new management team is acutely focused on generating returns for the company’s shareholders and the balance sheet stresses of previous years have been alleviated. The assets in Alberta’s deep basin are high quality and we have come to embrace what we believe is a secular long term natural gas bull case on the back of underinvestment from E&P’s and increasing demand from a number of directions including power generation within the United States and LNG exports from the U.S. Perhaps owing to its tumultuous past, BXE shares trade at a steep discount to the value of its proven reserves, a rarity in any energy market.
*Long* Franco-Nevada (FNV.TO)
Sorry for the boring suggestion but often times boring is beautiful. FNV is expensive yes, but it’s the highest quality exposure one can get to what we view as an encouraging but uncertain gold price outlook. Being free cash flow investors, FNV offers it in spades with an exceptionally high margin business model (mining royalties) a best in class management team and an undeniable track record of creating value for shareholders via smart deals at opportune times. All of this to say, we don’t have the most constructive market outlook so we think exposure to gold is warranted. In the current geopolitical and financial backdrop Franco Nevada is the most appropriate way to gain that exposure in a reasonably low risk way.
Past Picks: MARCH 14, 2017
*Short* Thomson Reuters (TRI.TO)
- Then: $57.95
- Now: $61.14
- Return: -5.50%
- TR: -5.50%
*Long* Parex Resources (PXT.TO)
- Then: $15.24
- Now: $16.46
- Return: +8.00%
- TR: +8.00%
*Short* Exchange Income Corporation (EIF.TO)
- Then: $38.90
- Now: $35.06
- Return: +9.87%
- TR: +9.02%
Total Return Average: 3.84%
Fund Profile: Sui Generis Investment Partners Master LP
Performance as of: March 2017
- 1 month: Fund 1.61 %, Index* 0.96%
- 1 year: Fund 2.65 %, Index* 14.33%
- May 2015: Fund 12.59%, Index* 2.70%
* Index: TSX Composite
Company Website: www.sgip.ca