Things may look dark, but it may be almost time for Canadian equities to shine
by Kristine Owram
The disparity between underperforming Canadian stocks and their shining US peers never stays this wide for long, which is why the manager of more than $600 million (US$478 million) at IA Clarington Investments Inc. is significantly overweight Canada.
“You’re just seeing such a huge divergence in both performance and valuation, and I do feel there’s an opportunity to close that gap a little bit,” said Terry Thib, portfolio manager at the firm, a unit of Quebec City-based Industrial Alliance Insurance & Financial Services Inc. “I think it’s overdone. This environment is a layup for Canada.”
Canada’s S&P/TSX Composite Index is down 1.2% year-to-date, while the S&P 500 Index is up 9%, leading to the widest valuation gap since 2008.
Thib, who focuses on North American small- and mid-cap equities, said less than 15% of his investments are in US securities, with the rest in Canada. His US investment allocation has trended lower this year as he believes equities are in a "classic later stage," where cyclicals rally and investors reallocate capital from growth to value stocks -- moves that tend to be good for Canada.
A broad commodity rally, stabilizing oil prices, a strong economy, firming inflation and rising interest rates should also help boost beaten-down Canadian stocks, which Thib believes are “extremely cheap.”
He sees particular opportunity in unappreciated companies that are exposed to the US Although the stronger Canadian dollar has negatively affected stocks that generate revenue south of the border, the healthy economy helps offset any currency losses, Thib said. The loonie is up 7.3% this year against its US counterpart.
"We’re trying to find what I like to call mini-blue chips, or tomorrow’s blue chips," he said.
Envelope Maker
Thib’s fund owns Tricon Capital Group Inc., a residential real estate firm that gets about half its income from managing single-family rentals in the US Toronto-based Tricon has recurring cash flows, strong return on equity, a healthy balance sheet and a 2.4% dividend yield, he said. The stock has gained 14% this year.
He also likes Supremex Inc., a La Salle, Quebec-based envelope manufacturer that has been moving into packaging and specialty products and is well positioned to take advantage of the growth in e-commerce. It got about a quarter of its revenue from the US and the rest from Canada in the second quarter, according to its earnings statement.
"Amazon’s just killing everybody, all of retail really, so there’s a real trend there and it’s growing rapidly," Thib said, adding that the stock is inexpensive with a 5.7% dividend yield, a strong balance sheet and a good track record of acquisitions. The company trades at a price-earnings ratio of 8.3, and the stock is down 16% this year.
Sticking with the theme of Canadian stocks that generate a significant portion of their revenue in the US, Thib also owns Hardwoods Distribution Inc., a Langley, British Columbia-based wholesale distributor of hardwood lumber and other wood products used in floors and cabinets. Hardwoods got more than 80% of its revenue from the US in 2016, according to data compiled by Bloomberg. Hardwoods has jumped 8% this year.
Besides offering exposure to the US market, these three stocks are not widely covered by analysts or followed by investors.
"That’s key to what we’re trying to do. We’re trying to go into the smaller areas of the market and exploit those inefficiencies," Thib said. "People don’t follow these names so you typically find better growth and better value."
Thib’s IA Clarington Growth & Income Fund has lost 0.5% this year. IA Clarington manages $14 billion overall.
Copyright Bloomberg 2017
Related stories:
Are investors ready to ignore market noise?
Are growth strategies sounder than value investing?
The disparity between underperforming Canadian stocks and their shining US peers never stays this wide for long, which is why the manager of more than $600 million (US$478 million) at IA Clarington Investments Inc. is significantly overweight Canada.
“You’re just seeing such a huge divergence in both performance and valuation, and I do feel there’s an opportunity to close that gap a little bit,” said Terry Thib, portfolio manager at the firm, a unit of Quebec City-based Industrial Alliance Insurance & Financial Services Inc. “I think it’s overdone. This environment is a layup for Canada.”
Canada’s S&P/TSX Composite Index is down 1.2% year-to-date, while the S&P 500 Index is up 9%, leading to the widest valuation gap since 2008.
Thib, who focuses on North American small- and mid-cap equities, said less than 15% of his investments are in US securities, with the rest in Canada. His US investment allocation has trended lower this year as he believes equities are in a "classic later stage," where cyclicals rally and investors reallocate capital from growth to value stocks -- moves that tend to be good for Canada.
A broad commodity rally, stabilizing oil prices, a strong economy, firming inflation and rising interest rates should also help boost beaten-down Canadian stocks, which Thib believes are “extremely cheap.”
He sees particular opportunity in unappreciated companies that are exposed to the US Although the stronger Canadian dollar has negatively affected stocks that generate revenue south of the border, the healthy economy helps offset any currency losses, Thib said. The loonie is up 7.3% this year against its US counterpart.
"We’re trying to find what I like to call mini-blue chips, or tomorrow’s blue chips," he said.
Envelope Maker
Thib’s fund owns Tricon Capital Group Inc., a residential real estate firm that gets about half its income from managing single-family rentals in the US Toronto-based Tricon has recurring cash flows, strong return on equity, a healthy balance sheet and a 2.4% dividend yield, he said. The stock has gained 14% this year.
He also likes Supremex Inc., a La Salle, Quebec-based envelope manufacturer that has been moving into packaging and specialty products and is well positioned to take advantage of the growth in e-commerce. It got about a quarter of its revenue from the US and the rest from Canada in the second quarter, according to its earnings statement.
"Amazon’s just killing everybody, all of retail really, so there’s a real trend there and it’s growing rapidly," Thib said, adding that the stock is inexpensive with a 5.7% dividend yield, a strong balance sheet and a good track record of acquisitions. The company trades at a price-earnings ratio of 8.3, and the stock is down 16% this year.
Sticking with the theme of Canadian stocks that generate a significant portion of their revenue in the US, Thib also owns Hardwoods Distribution Inc., a Langley, British Columbia-based wholesale distributor of hardwood lumber and other wood products used in floors and cabinets. Hardwoods got more than 80% of its revenue from the US in 2016, according to data compiled by Bloomberg. Hardwoods has jumped 8% this year.
Besides offering exposure to the US market, these three stocks are not widely covered by analysts or followed by investors.
"That’s key to what we’re trying to do. We’re trying to go into the smaller areas of the market and exploit those inefficiencies," Thib said. "People don’t follow these names so you typically find better growth and better value."
Thib’s IA Clarington Growth & Income Fund has lost 0.5% this year. IA Clarington manages $14 billion overall.
Copyright Bloomberg 2017
Related stories:
Are investors ready to ignore market noise?
Are growth strategies sounder than value investing?
