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

Focus: Canadian equities
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MARKET OUTLOOK
While we are somewhat surprised by the market reaction to Donald Trump being elected the next president of the United States, we remain cautious in the near term as we believe there remains considerable uncertainty in the outlook for stocks. The rise in bond yields, namely U.S. 10-year treasuries now yielding above 2.05 per cent, represents the removal of a very powerful tailwind for equity valuations and consumer borrowing alike. It would be prudent for investors to wait for clarity on policies involving trade, fiscal stimulus and defence from the new administration in the U.S. before committing substantial capital to equities, as many trade at or near all-time highs with valuations that we believe are stretched.

TOP PICKS

SHORT: CI FINANCIAL (CIX.TO)
This trade continues to work, and the rally over the last week had us adding to the position for the first time in a while. The continued decline in Canadian mutual fund sales is the sort of secular trend that should work whether markets are rising or falling. We believe the mutual fund business is in structural decline, and CI specifically is seeing strong net outflows of capital while still trading at what we believe is an excessive multiple (seven per cent of AUM). Management fee pressure, competitive pressure and regulatory pressure are all conspiring against CIX right now. 

LONG: COTT CORPORATION (BCB.TO)
Cott is now much more focused on home and office delivery of water and coffee products than on being a brewer of soda. It is the sort of free cash flow business we love and we have recently added the stock back to our portfolio on the pullback seen over the last few months. With a 10 per cent free cash flow yield at these levels, we believe the company will pay down debt appropriately after making several acquisitions over the last two years. It’s the sort of name where over time, we see value accruing to the equity holders as debt gets paid down. 

SHORT: EMERA (EMA.TO)
While this may not seem like the most exciting short in the world, we believe investors are underestimating the severity of the move in bond yields and the subsequent impact on heavily-indebted companies. Emera, having recently purchased TECO, is now saddled with $14.7 billion in deb,t which represents a roughly 13x debt/cash flow ratio on a stock that trades an excessive 18x earnings multiple. In an environment that looks as though the new U.S. administration will borrow heavily to stimulate their economy, one would expect interest rates to continue their upward move and put pressure on both the valuation and borrowing capacity of companies like Emera. Should you find yourself searching for yield, a bank is likely a more suitable investment in this environment.
 

PAST PICKS: SEPTEMBER 15, 2016

SHORT: CI FINANCIAL (CIX.TO)

• Then: $25.01
• Now: $25.31
• Return: 1.19%
• TR: +2.14%

CASCADES (CAS.TO)

• Then: $11.88
• Now: $12.55
• Return: 5.63%
• TR: +5.63%

PAIR TRADE

• LONG: TRANSALTA (TA.TO)
  • Then: $6.01
  • Now: $5.61
  • Return: -6.65%
  • TR: -6.65%
• SHORT: TRANSCANADA (TRP.TO)
  • Then: $61.49
  • Now: $59.96
  • Return: +2.48%
  • TR: +1.60%
     
• PAIR TRADE RETURN: -5.05%

TOTAL RETURN AVERAGE: +0.90%