A contrarian who favours natural-gas stocks

Invesco Trimark's Ian Hardacre expects turnaround

Sonita Horvitch 2 February, 2011 | 7:00PM
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 Ian Hardacre, vice-president at Invesco Trimark Ltd., says that it is challenging to find value opportunities in either the Canadian or global equity markets. "We have been net sellers of stocks since the beginning of the year and have been raising cash in portfolios, including Trimark Canadian," he says.

"Some of the stocks that we own had great runs in 2010, particularly in the fourth quarter, and hit our targets, so we trimmed them," Hardacre says. The few new buy opportunities that he and his team have unearthed "have the same risk/returns as the stocks already in the portfolio, so there is little incentive to buy them."

Hardacre's call is that equity markets will produce good returns in 2011, but that they will be fairly volatile. "This volatility creates opportunities." As a value manager, Hardacre says his style involves some focus on industries or stocks that are out of favour. "This contrarian stance requires patience."

A 15-year veteran of Invesco Trimark, Hardacre is the lead manager of both Trimark Select Balanced and Trimark Canadian. Currently, the $1.6-billion Trimark Canadian holds about 28% of its assets in foreign securities. The fund is fairly concentrated in 41 names, of which 14 are outside Canada. Cash is around 4%, says Hardacre. "It has not been this high in a couple of years."

At last count, the biggest sector weightings in Trimark Canadian were financials at around 25% and energy at 22%. The weighting in the materials sector was modest at 7%, with some 4.5% in gold stocks. Within energy, Hardacre's holdings in the producers are split evenly between oil and natural-gas producers.

Hardacre notes that natural gas is one of the few commodities that actually went down in price last year. The fundamentals for the commodity have become unfavourable as a result of the increase in supply due to technology changes in the industry, he says.

Over time, "demand will increase and boost the price." In the meantime, Canadian natural-gas producers do not need the commodity to rise sharply to do well. "There is good value to be had in natural gas stocks."

Ian Hardacre

The biggest natural-gas weighting in Trimark Canadian is Progress Energy Resources Corp. PRQ, which is 5% of the fund and in its top 10 holdings. Progress has 85% of its production in natural gas. Current production is 42,000 BOE (barrel of oil equivalent) per day. "It has not been focusing on growing its production, but on building its land inventory."

Progress has a major land position in the Montney shale play, says Hardacre. It has amassed 900,000 net acres of land "at the right price." The focus of its exploration has been on the North Montney play in the Foothills of northeast B.C. Progress is seeking a joint-venture partner to develop portions of this. "This will provide it with more capital and also place a value on these assets."

Progress, he notes, has also built up a substantial land base in the Deep Basin of northwest Alberta. On a cash-flow-per-share multiple, the stock looks expensive, says Hardacre, but the value is in the land holdings.

Other natural-gas producers held in Hardacre's portfolio are Encana Corp. ECA at 2.5% and Tourmaline Oil Corp. TOU at 1.5%. "I owned Tourmaline as a private company and it was taken public at $21 a share toward the end of last year."

Encana Corp. Progress Energy
Resources Corp.
Feb. 1 close $32.13 $13.73
52-week high/low $35.90-$27.70 $14.37-$10.30
Market cap $23.7 billion $2.9 billion
Total % return 1Y* -1.9 0.4
Total % return 3Y* -1.2 -0.1
Total % return 5Y* 3.8 -0.4

*As of Feb. 1, 2011
Source: Morningstar

A long-standing favourite of Hardacre's among the gold producers is Yamana Gold Inc. YRI, which has interests in Brazil, Argentina, Chile, Mexico and Colombia. At recent close, Yamana traded at nines times cash-flow-per-share estimates for 2011 versus a multiple of 13 to 15 times for its Canadian peers.

Over the last few years, Yamana's production has been flat, says Hardacre. The company will be ramping up its production in 2012 and 2013 from the 1.1 million gold-equivalent ounces in 2011 (the company also produces silver) to an expected 1.4 million ounces in 2013. "The stock market is not giving Yamana credit for this." Also, copper, which has been a strong performing commodity, represents "20% of Yamana's cash flow and this is a strong positive."

In keeping with his contrarian stance, Hardacre is enthusiastic about the prospects of Research in Motion Ltd. RIM, which is in the top 10 holdings in the fund. "The Street is overly bearish on this stock on concerns about its loss of market share in the United States," says Hardacre.

But smart-phone growth remains strong and RIM is clearly one of the major players globally in this field, he says. Also, the company will be launching its PlayBook this March, in answer to Apple's iPad. Finally, RIM would be "of huge strategic value" to a company like Microsoft, which does not have a presence in the mobility space, says Hardacre. "In all, RIM is well managed and is a powerful free-cash-flow generator."

Of his financial-services holdings, Hardacre notes that he owns both Canadian and foreign stocks, which include a number of non-bank financials. His "diversified" holdings include two Canadian banks: Toronto-Dominion Bank TD and Bank of Nova Scotia BNS. "They represent 7% of the portfolio and are core holdings." Managers with Canadian-only mandates are likely to have a much higher weighting in the Canadian banks, he says.

A major Canadian wealth-management company that he sold from his portfolio is IGM Financial Inc. IGM. He also sold his stake in Power Corp. of Canada POW, which has an indirect stake in IGM and in Great-West Lifeco Inc. GWO. "I sold these two stocks last year; there were better ideas and better opportunities elsewhere."

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Sonita Horvitch

Sonita Horvitch  

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