Fundamentals diverge for commodities

Guardian Capital's Ted Macklin sticks with slumping gold stocks.

Sonita Horvitch 4 July, 2012 | 6:00PM

 Ted Macklin, managing director of Toronto-based Guardian Capital L.P., is picking his spots carefully among commodity-related stocks for the larger-cap Canadian equity portfolios he manages. "There are substantial differences in the fundamentals for each commodity against a backdrop of lacklustre global economic growth," he says.

In energy, Macklin "continues to be cautious" about natural gas. "The changes to the production technology have boosted the commodity's supply profile." Even if the natural-gas price improves over time, "it is unlikely to regain previous cyclical highs," he says.

Macklin is "more constructive" on oil over the longer term, despite short-term concerns about the strength in global economic growth. He has also retained his belief in the long-term global demand for uranium.

The Fukushima nuclear-plant meltdown in Japan in the aftermath of the earthquake and tsunami on March 11, 2011, affected the demand for nuclear power in countries like Germany and Japan, Macklin says. "But even Japan has stated recently that it will restart two reactors and the demand for nuclear power in China remains robust."

Turning to materials, Macklin has maintained his holding in gold stocks, which are down so far this year. "Even though the price of bullion has retreated, the outlook for this precious metal is favourable, given the persistent global uncertainties."

Of gold's weakness, Macklin points out that the bullion price tends to move in the opposite direction to the U.S. dollar. "Currently the U.S. dollar is strong relative to the euro, because of Europe's financial ills."

A member of Guardian Capital's eight-person team, Macklin employs an investment style of growth at a reasonable price. He reports that he is finding a higher than usual number of opportunities to make changes to his Canadian equity portfolio, because of the volatility in the market.

 
Ted Macklin

"The sharp swings in investor sentiment from risk-tolerant to risk-averse means that a range of stocks temporarily trade above or below their fundamentals, depending on the prevailing sentiment," Macklin says. There is, he adds, a need to stay focused on the long-term earnings potential of the companies and take advantage of short-term shifts in valuations.

Macklin says he is also finding that a number or Canadian companies that he invests in are displaying the same discipline in acquiring companies that they consider represent both good value and have favourable long-term prospects. "They are looking beyond the European financial crisis for opportunities."

An example, he says, is the Canadian information-technology services provider CGI Group Inc. GIB.A. The company recently made a $2.8-billion bid for UK-based Logica PLC, a company in its field. Macklin says this move by CGI takes advantage of lower valuations in Europe and the strengthening Canadian dollar against the British pound. CGI is "a holding in my primary institutional portfolio; I like this European deal."

Another example, he says, is the global convenience-store chain Alimentation Couche-Tard Inc.'s $2.7-billion takeover of Norway's Statoil Fuel & Retail. Macklin also likes this deal. Couche-Tard (ATD.B/TSE) "is expected to expand this Norwegian company's reach in Europe."

Macklin notes that he recently took some profits in his holding in Couche-Tard, taking advantage of the rally in the stock in June. "But I continue to like the company."

At Guardian Capital, which has total assets of $15.5 billion under management, Macklin is directly responsible for managing $1 billion mainly for institutional investors, predominantly pension funds. His "primary portfolio" has 47 names and is benchmarked against the S&P/TSX Composite Index.

Across the sectors, Macklin has an underweight in energy at 21.6% (25% in the index) and a near-market weight in materials with 18.8% (19.2% for the index). In materials, his gold weighting is 9.4% versus 10.7% in the index. "This is a higher weighting than it has been historically."

Industrial stocks are a modest overweight at 7.4% versus the index's 6.1%. Consumer- discretionary stocks represent 9.6% (4.7%) of the portfolio and consumer staples 6.9% (3.1%). "The consumer on both sides of the border is stable," he says.

Finally, the portfolio is underweight in financials at 24.7% (31.8%). Macklin reports that he is "substantially underweight" in the life insurers, but is "well represented" in the major Canadian banks."

In energy, Macklin says he is "underweight the traditional integrated and exploration and production companies, which are sensitive to the prices of oil and natural gas." A global energy-services company that he likes is ShawCor Ltd. SCL.A. This company specializes in products and services for the energy and industrial markets.

ShawCor's services include the construction and maintenance of pipelines. "The business is more related to energy infrastructure than to the price of natural gas and of oil," says Macklin. The stock trades at 12 times consensus earnings-per-share estimates for 2013.

Macklin sold the remainder of his holding in the large-cap natural-gas producer EnCana Corp. ECA, on a recent rally. "I had started to reduce my holding late in 2011."

But he has been adding to his holding in the major uranium producer Cameco Corp. CCO. "I have been patient with this stock, even though uranium fell out of favour last year." The stock trades at 13.6 times consensus earnings-per-share estimates for 2013.

In materials, Macklin's biggest gold holding is Franco-Nevada Corp. FNV, which is a gold-focused royalty company. This stock, which he recently trimmed, represents 4.4% of the portfolio. He also has holdings in Goldcorp Inc. G at 3.1% of the portfolio and in Barrick Gold Corp ABX at 1.9%. "I am emphasizing royalty companies versus the gold producers, as the producers are facing the headwind of rising costs."

Barrick Gold Corp. Franco-Nevada Corp. Goldcorp. Inc.
July. 3 close $39.50 $47.24 $39.90
52-week high/low $55.36-$35.11 $49.02-$35.50 $55.93-$32.52
Market cap $38.7 billion $7.0 billion $32.2 billion
Total % return 1Y* -9.8 33.7  -12.5
Total % return 3Y* 0.6 19.8 -0.1
Total % return 5Y* 5.5 NA 9.7
*As of July 3, 2012.
Source: Morningstar

In the financial-services sector, Macklin has long focused on three of the Big Five banks: Bank of Nova Scotia BNS, Toronto-Dominion Bank TD and Royal Bank of Canada RY.

Macklin says that he continues to be "comfortable with Royal Bank's capital-markets strategy," despite the recent credit-rating downgrade of the bank by Moody's Investor Services. This rating agency, he says, reduced its credit ratings on 15 global financial institutions because of their exposure to the capital markets, with the associated volatility and risk.

Royal, says Macklin, expanded its capital-markets business coming out of the global credit crisis in 2009 and it is "managing this business successfully." In all, "Royal remains a high-quality bank."

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Sonita Horvitch

Sonita Horvitch