As Europe gears up, some Canadian stocks gain traction

CI sub-advisor Daniel Bubis favours economically sensitive sectors.

Sonita Horvitch 21 August, 2013 | 6:00PM

 Daniel Bubis, president and CEO at Winnipeg-based Tetrem Capital Management Ltd., says that a number of global companies with significant operations in Europe have already seen a lift in their stocks in anticipation of better economic times for that region.

It was certainly advantageous to invest, for example, in select Canadian economically sensitive companies with European exposure a year ago, he says. "At that time, these stocks were particularly cheap," says Bubis, who is a value manager.

Some of these stocks, including those in the Canadian consumer-discretionary sector, have had a good run since the beginning of the year, he says. "The valuations are no longer as compelling as they were a year ago, but the stocks still have further to run, given the companies' stronger fundamentals."

Strategically, Bubis is favouring select economically sensitive stocks over the more defensive, dividend-paying names, which he describes as "bond proxies." A lot of money had flowed into the stocks after the global financial crisis, making for something of a bubble, he says. "While these stocks have corrected more recently in the face of rising interest rates, they could still be vulnerable."

Bubis raised the foreign content in the Canadian funds that he manages a year ago and "this has paid off." But he considers that investor concern about the health of the emerging markets and Canada, "seen simplistically as a proxy for these markets because of its natural-resource weighting," has been overdone. Also, he adds, some commodity prices, such as oil and natural gas, have been going up.

In all, he says, the Canadian equity market is being "excessively punished" for its sensitivity to emerging economies. "Investors are ignoring the fact that the Canadian economy is also closely tied to the improving health of both the U.S. and European economies."

 
Daniel Bubis

At the end of July, Tetrem had $5 billion in assets under management, with CI Investments its largest client. Heading the list of its CI mandates are CI Canadian Investment   with assets of $2.3 billion and CI Canadian Investment Corporate Class, with $976 million.

Bubis and his team target stocks that trade below Tetrem's estimated intrinsic value. At recent count, CI Canadian Investment had 26% in U.S. stocks and 12% in international holdings. Cash represented 6% of the portfolio.

Two Canadian consumer-discretionary stocks that were bottom-up value choices some time ago and that are now benefitting, in part, from renewed investor confidence in a European recovery, are Magna International Inc. MG and Thomson Reuters Corp. TRI. Both are top-10 holdings in the fund.

Global auto-parts giant Magna, says Bubis, is "generating strong revenue growth and improving profit margins, against the backdrop of rebounding auto-sales." Investors, he says, had put the stock in the "penalty box" because of Magna's European exposure. "This is even though many autos manufactured in Europe were being sold elsewhere."

Magna's stock, he says, has done well this year, thanks to the company's stronger fundamentals and the more positive investor sentiment. "We have judiciously trimmed back our holding, but maintain a significant weight in this name."

Thomson Reuters' stock started the year "too cheaply and has done well since," says Bubis. On the fundamentals, Thomson's "challenging acquisition of Reuters to create a global media and information behemoth is starting to work out." The stock "was, in part, penalized for the company's exposure to Europe, but it too is participating in the more bullish sentiment about its recovery."

In the Canadian technology sector, the portfolio has a significant weighting in CGI Group Inc. GIB.A, a global information-technology services company. CGI is a great cash-flow generator and a consolidator in its field, says Bubis. Last year, the company acquired Logica PLC at a "bargain-basement valuation." This acquisition greatly expanded CGI's European reach. "CGI will benefit when Europe turns the corner and the European companies invest more in technology."

CGI Group Inc. Magna International Inc. Thomson Reuters Corp.
Aug. 19 close $35.70 $82.97 $35.74
52-week high/low $36.73-$22.33 $85.40-$42.19 $36.98-$26.65
Market cap $11.0 billion $19.1 billion $29.4 billion
Total % return 1Y* 46.2 86.6 24.9
Total % return 3Y* 34.6 27.1 2.4
Total % return 5Y* 26.1 22.6 3.8
*As of Aug. 19, 2013
Source: Morningstar

South of the border, CI Canadian Investment's biggest sector exposure is to technology. The portfolio holds a number of U.S.-based brand-name global companies including Microsoft Corp MSFT, Cisco Systems Inc. CSCO, Intel Corp. INTC and Google Inc. GOOG. "Like CGI, these companies all stand to reap the rewards of an improving European economy," says Bubis.

Based on valuation, Bubis has sold the portfolio's holding in Adobe Systems Inc. ADBE. "The stock had done well." It was, he says, a good opportunity "to sell a winner and there was better relative value to be had among its peers."

Turning to natural resources, the Canadian portion of the portfolio continues to be overweight in the energy sector, says Bubis, "but I have been realigning the holdings in this sector."

Two sales from this sector were Imperial Oil Ltd. IMO and EnCana CorpECA. Of Imperial Oil, Bubis says: "The stock recently had a good run and the company's return on capital is shrinking, so we sold the stock."

EnCana's stock is "cheap," says Bubis. But it could tread water for a while, he says. "There might be no further upside in its natural-gas business, which has benefitted from the rebound in natural-gas prices." Also, he cautions, its oil business could take a long time to turn around.

The largest energy holding in the portfolio continues to be Suncor Energy Inc. SU. "It is good at capital allocation, increasing its dividend, buying back shares and leaving sufficient cash in the business to ensure growth." Also, its capital-expenditure requirements are less intensive going forward."

Bubis has added to the portfolio's holding in Canadian Natural Resources Ltd. CNQ. "The company has rising returns on capital and the stock is cheap."

A new addition is Crescent Point Energy Corp. CPG. The stock trades at a premium valuation relative to its peers, says Bubis, but this is warranted, as Crescent Point is "best in class."

Investors were skeptical, he says, about Crescent Point's capital allocation. He noted that the company pays a substantial dividend and, at the same time, is making acquisitions by issuing more shares.

The result, he says, was that Crescent Point stock became inexpensive by historic standards. "These acquisitions are starting to bear fruit," says Bubis, "and the market is starting to believe." Also, "the company is easing up on its acquisitions."

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Sonita Horvitch

Sonita Horvitch