Hello everyone and welcome to today’s live discussion. I’m Darcy Keith, editor of Inside the Market. We’ll be getting underway shortly. Please leave your questions for Fabrice at any time.
Welcome, and thanks for joining us today.
Fabrice, let me start off by asking you about your general market view right now for the small cap sector. The Russell 2000 entered correction territory last week (10% fall plus) and small caps in general are underperforming. Are you finding it easier to pinpoint solid values in the small-cap sector now following the recent slide?
It's pretty dangerous to be in small caps. It's just that late stage of the market.
Fortunately I've advised subscribers to raise cash for about a year now and we've sold a number of our smaller names for a nice gain.
Although I don't just cover small caps, in that arena I'm looking for fundamental value - a floor under my feet so to speak.
Can you tell us some of the names you sold?
We got out of Athabasca Minerals at about $2.85. Bought at 25 cents in 2011. It's $1.65 or so now.
We also took profits on Enterprise Group and Patient Home Monitoring, although I continue to own the latter.
And Neulion, which was a nice pass.
I always stress to subscribers that they should take profits and aim to get their original capital back plus a profit then let the rest ride.
Are there any sectors that are looking more attractive than others at this time after the recent weakness?
We've been buying Delavaco Residential Properties, which is a small cap U.S. real estate play. It has a solid book value that I believe is about 15% higher than the stock price. That combined with an improving U.S. economy gives me confidence.
Is real estate then a sector where you are seeing good values right now?
U.S. real estate yes. Canadian real estate no. I believe the residential market in Canada is in for some pain.
I want to add that I also like royalty companies. They have been good to us in the past (Alaris, which we doubled our money on but sold too soon.)
Bond yields keep threatening to go up, but an upward march in yields doesn’t seem to want to stick. What’s your view on interest rates and the resulting outlook on dividend and REIT sectors at this juncture?
I think we're in for a generation of low interest rates because of demographics and weak employment/inflation. Technology is destroying jobs so quickly that I can't see purchasing power going up in the aggregate. And the demand for yield from aging boomers will keep interest rates low.
Everyone points to all this debt in the world but for every dollar of it there is by definition a dollar of savings - demand for yield.
So that should mean REITs and dividend stocks will be relatively safe places for investment capital going forward, should it not?
Rates could rise a little, which can hurt REITs, especially those that have done well on refinancing. But over the foreseeable future I just don't think rates will rise that much. So relatively, yes but REITs have other risks. Many are richly valued and it's a very competitive space.
Something I’ve often wondered about: What’s the maximum market cap for a stock to be considered a “small cap stock” in Canada?
Great question. In the US a small cap can be $1 billion
We've invested in companies with market caps of $3 million (and done very well)
In Canada, because there's not much private equity, companies go public sooner.
I still maintain that to really do well in stocks you have to own at least some smaller names but you just have to do your homework.
A reminder to users: you can ask a question of Fabrice at any time.
Fabrice: What’s your view on oil stocks right now? They’ve suffered a big tumble as global oil prices have declined. Some suggest they have been overly punished, however, given the currency tailwind they should be receiving from a weakening loonie, and the now much narrower differentials of Canadian oil prices vs. global values.
There are sanctions against Russia and Iran, two big producers.
There is war in the Middle East that looks to get a lot worse
Yet oil prices are falling. Normally they'd be surging.
So it's clear that there's an imbalance in demand and supply.
These shale deposits are cranking out lots of oil. It remains to be seen if they're truly economic (and at what price?)
I'd would be cautious about oil stocks because while they may look cheap relative to their dividend yields or net asset values, both can change in a hurry with changing oil prices. The Alberta economy has done well the past three years but there are risks now.
Stocks in general: the market is a cycle and we're in the late stages of it. You want to be in early and fully invested at the beginning of the cycle and as it marches on you peel off profits and gains and build cash.
I always say that an investor's job is to generate cash from his/her portfolio, not paper gains.
Any oil stocks you would recommend at this juncture?