The stealth recovery

Positive resources outlook overlooked, Manulife's Ted Whitehead says.

Sonita Horvitch 14 November, 2012 | 7:00PM
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 Ted Whitehead, senior managing director and senior portfolio manager at Manulife Asset Management Ltd., says investors are too negative about the prospects for energy and base-metals commodities because they are underestimating the global economy's vigour.

"The two economic gorillas, the United States and China, are showing signs of improvement," says Whitehead. In China, "the ushering in of a new political regime next March should see a revived effort to stimulate the economy."

In perspective, he says, China uses some 40% of industrial commodities produced globally. "When it comes to energy, China takes roughly 10% of global production, while the United States is a far larger consumer at 20%."

An improvement in demand from China and the United States should boost commodity prices, says Whitehead, who specializes in managing small- and mid-cap stocks using a growth discipline. "The prognosis for natural-resource stocks is accordingly good," he adds.

Currently, he says, there are many quality mid-cap energy and base metal producers trading at the low end of their historic ranges. "There are, for example, mid-cap energy producers with a robust production growth profile trading at 4.5 times 2013 cash-flow-per-share estimates."

There is generally, says Whitehead, a marked difference between the negative macroeconomic headlines and the actual performance of the companies operating in a wide range of industries.

Ted Whitehead

"The underlying businesses are performing quite well," he says, "but their stocks are being tarnished by the persistence of doom and gloom news." This widespread lack of appreciation for companies with a solid growth profile provides an opportunity, says Whitehead.

At Manulife Asset Management, Whitehead is responsible for managing $1.5 billion in assets, of which some $575 million is in his flagship mandate, Manulife Growth Opportunities. This fund is benchmarked against the BMO Small Cap Blended (Weighted) Total Return Index.

The fund is mandated to hold at least 40% in small-cap stocks, which are defined using the BMO Small Cap threshold. This currently imposes a market-cap ceiling of $1.6 billion.

At present, Manulife Growth Opportunities, which holds 83 names, has 51% in small-caps, 45% in mid-caps and the balance in cash. In stock selection, Whitehead uses proprietary quantitative models that rank stocks and follows this up with fundamental analysis.

The fund currently has an overweight in energy at 22% relative to its benchmark, and an underweight in materials at 22%. The emphasis in both sectors, says Whitehead, "is on seasoned mid-cap companies that have good production growth rather than on juniors, which are having problems bringing their projects on stream."

Energy producers GranTierra Energy Inc. GTE and Coastal Energy Co. CEN are among the top holdings of Manulife Growth Opportunities.

GranTierra is a long-standing holding. The company is focused on oil and gas production in South America. Its most important asset is the Costayaco field in Colombia. "GranTierra has an excellent production growth profile and the stock is cheap," Whitehead says.

Coastal Energy's principal assets are in Thailand and Malaysia. "Indonesia's state-owned oil and gas company, Pertamina, has expressed an interest in buying the company."

Whitehead took advantage of the June-end takeover bid for Progress Energy Corp. PRQ by the Malaysian national oil and gas company, Petronas, to sell his holding in Progress. "Petronas' bid remains under scrutiny from Ottawa under the Investment Canada Act."

In the materials sector, copper and zinc producer Lundin Mining Corp. LUN is "reasonably priced" at 0.75 times net asset value (NAV) per share, says Whitehead. "It has a good production-growth profile and is a strong cash-flow generator."

Lundin's core asset is its 24.75% interest in the "giant" Tenke Fungurume copper mine (45% of NAV) in the Democratic Republic of Congo. Lundin also has extensive European interests, says Whitehead. Its Neves Corvo mine (35% of NAV) in Portugal and the Zincgruvan mine (15% of NAV) in Sweden, are both operational. Its Aguablanca nickel mine (5% of NAV) in Spain "is in the process of restarting."

Whitehead purchased a holding in Stella-Jones Inc. SJ this spring. Also in the materials sector, Stella-Jones is a leading North American manufacturer of pressure-treated wood products, specializing in railway ties and utility poles.

Some 90% of its business is maintenance and replacement of infrastructure, which makes it like a utility, he says. "The company should benefit from the recent devastation by Hurricane Sandy." Another positive development, he says, is Stella-Jones' recently announced purchase of rival McFarland Cascade Holdings Inc. of Tacoma, Wash. "This should be 10% accretive to earnings. "

Lundin Mining Corp. Stella-Jones Inc.
Nov 13 close $7.24 $65.21
52-week high/low $14.23-$4.88 $77.24-$51.56
Market cap $875 million $10.6 billion
Total % return 1Y* -46.4% 14.4%
Total % return 3Y*  8.3% 12.3%
Total % return 5Y*  -1.0% 11.6%
*As of Nov. 13, 2012
Source: Morningstar

Whitehead has been increasing his exposure to U.S. equities, which represent about 14% of Manulife Growth Opportunities. "I am focusing on those U.S. companies that specialize in niches; a lot of successful Canadian niche players have been the subject of foreign takeovers."

In financials, (19% of the portfolio), Whitehead likes ProAssurance Corp. PRA, a major provider of medical professional-liability insurance in the United States. "It is an efficient operator in this niche." The company, he says, has been able to produce solid growth in its book value for more than a decade, and it recently introduced a share-buyback program."

A U.S. consumer-discretionary stock and a major global player in its niche in the portfolio is Smith & Wesson Holding Corp. SWHC. Founded in 1852, "the company is a premier manufacturer of firearms."

Smith & Wesson's high growth market is the sale of pistols and rifles to the military and police, says Whitehead. It also sells to consumers. "Here, demand remains strong." The stock is cheap, he says, trading at 10 times 2013 earnings per share estimates.

From the Canadian consumer-discretionary sector, Whitehead sold his holding in Cogeco Cable Inc. CCA. The company, "which has successful operations in Canada, has a poor track record of making acquisitions," he says.

Cogeco Cable sold its "struggling" Portuguese subsidiary Cabovisao S.A. early in the year at a loss, Whitehead says. Then, this summer Cogeco announced a US$1.36-billion purchase of the privately held U.S. cable-provider Atlantic Broadband, "after which I sold Cogeco's stock." The company he says, "paid top dollar for this U.S. purchase and there is a lack of potential synergies."

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Sonita Horvitch

Sonita Horvitch  

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