Jason Mann, chief investment officer at EHP Funds 
FOCUS: North American stocks

Markets continue to rally, looking through the resurgence of COVID in some countries, backstopped by supportive central banks and ongoing fiscal stimulus from the Biden administration.

Earnings have also been stellar, doing their best to catch up to some historically high valuations. Fund flows into equities are very strong, and corporate buybacks have returned in force.

Central banks are now dealing with a different problem: inflation. While some of the problems are supply chain related, the reality is that demand for products and labour is far outstripping supply.

We think resurgent COVID won’t slow re-openings much, particularly in large economies like the U.S., which continue to take a “plough forward” approach overall. The other reality is that case counts are the less important measure than hospitalizations.

That, coupled with fiscal stimulus, is leading to a “transitory for longer” environment for inflation. So much so, in our view, that the real risk currently is “stagflation” where inflation increases as growth slows from its peak. 

In a stagflation environment, you want a barbell approach of stocks that benefit directly from inflation: commodities and related businesses, as well as high-quality, larger-cap, low volatility stocks with strong earnings growth (as opposed to speculative top-line growth).

High-priced growth stocks are at great risk in this environment, as the last month has shown, with many former high-flying tech stocks off 50 per cent or more from their peaks. It’s a long way down from “growth” to “value”.

That has us maintaining weights to high-quality cyclicals in materials (lumber, copper, steel), as well as related construction and transportation businesses, and then exposure to larger financial and technology businesses. We’re avoiding or are net short expensive growth stocks and more defensive sectors like utilities.


Jason Mann's Top Picks

Jason Mann, chief investment officer at EHP Funds, discusses his top pcisk: Canadian Natural Resources, Sprott Physical Uranium, and Copper Mountain Mining.

Canadian Natural Resources (CNQ TSX)
Despite recent returns, energy stocks remain cheap – and in fact are actually *cheaper* than they have been in years due to the very strong cash flow that has reduced debt and been used to buy back shares or do accretive acquisitions.

While the high price of natural gas and crude oil are the drivers, if we are in a “transitory for longer” environment, prices may well stay high for some time to come.

Perversely, ESG policies, which have starved the industry of capital, and pushed governments to delay or stop new traditional energy development and pipelines, are also causing higher prices. CNQ has a large, diversified asset base in natural gas, crude oil, oil sands, and overseas.

Has both strong price momentum, in the top 10 per cent of TSX stocks, but also scores well on value. Trades at 6x EV/EBITDA, 13x PE, 8x Free cash flow. No balance sheet issues, and a healthy yield at 4.5 per cent. They been using cashflow to reduce debt, pay dividends, and return capital to shareholders. Recently announced purchase of Storm Resources – immediately accretive, and didn’t need to pay much a premium for the assets, assuming they are able to close the transaction.

A stable way to participate in what we think are fairly early innings for the energy bull market.

Sprott Uranium Trust (U-U TSX)
This pick is more of a special situation, as SPUT as its now known is a pure-play on the uranium physical market. It’s not an ETF though, rather it’s a closed-end fund, and its sole purpose is to issue units to buy and sequester physical uranium “yellowcake”.

Uranium spot market has been dead money since Fukushima back in 2011, as the world turned away from nuclear despite having some of the most obvious “green” characteristics versus alternatives.

New reactor technology is materially different and much less risky vs. historical, and we think it’s obvious that the world needs to come around to nuclear as one of the best alternative energy sources. We’re seeing this globally now – extensions to existing power plant lives, China committing massively to new reactors, and former opposition to nuclear turning quickly in Europe.

SPUT has up-ended the spot market for uranium, they use an “ATM” to issue units in the market when trading at a premium to net asset value, and then buy spot in the market and can continue to issue as long as there are buyers. They’ve acquired 21mm pounds already, with spot prices doubling off their lows as a result.

What’s key is that these pounds are sequestered essentially forever. There is no mechanism for these pounds to be sold back into the market.

Spot market is believed to be getting thin, and this buying pressure could really squeeze the market higher. Primary producers don’t make money until about $60/lb, so new supply is constrained. Uranium traded north of $140/lb back in 2007, would mean a tripling of price for U.UN if we saw that again. Uranium is a small part of the operating costs of a reactor, and there are no replacements, so there is a fair bit of price insensitivity. We really like the risk-reward here in a recovering uranium market. A lower risk, and direct way to play versus primary producers with operating and mine risk.

Copper Mountain (CMMC TSX)
We like copper in general as one of the commodities that should do well during periods of inflation, and as a key metal for the electrification of infrastructure that comes with the move to clean energy. Copper is another commodity that is undersupplied relative to demand, and it’s not easy or fast to bring on new mines.

Copper Mountain is a Canadian producer with flagship mine in B.C., produces ~ 100mm pounds of copper equivalent per year. Also has development projects in Australia, both politically stable markets unlike miners in more exotic locations.

Copper miners have sold off from their April highs as the metal price has gone sideways, but valuation is compelling at these prices. CMMC is in the top 1 per cent of stocks we follow in terms of value, trades at 3.4x Free-cashflow, 3.6x EV/EBITDA, 7.5x PE, with high return on equity of 36 per cent. Balance sheet it solid.

Also has strong price momentum over the past year which is what we look for, particularly when coupled with good valuation.

Like all mining stocks, they are cyclical businesses that rely on a healthy underlying commodity market, we believe that this “transitory for longer” environment makes that the more likely scenario.




PAST PICKS: November 13, 2020

Jason Mann's Past Picks

Jason Mann, chief investment officer at EHP Funds, discusses his past pcisk: Celestica, IA Financial Group, and Tourmaline Oil.

Celestica (CLS TSX)

  • Then: $9.30
  • Now: $14.28
  • Return: 54%
  • Total Return: 54%

iA Financial (IAG TSX)

  • Then: $56.54
  • Now: $72.41
  • Return: 28%
  • Total Return: 33%

Tourmaline Oil (TOU TSX)

  • Then: $17.78
  • Now: $45.84
  • Return: 158%
  • Total Return: 166%

Total Return Average: 84%