Ninepoint Concentrated Canadian Equity Fund

December 2019 Commentary

The S&P/TSX added 0.5% as Energy (+6%), Materials (+5%) and Information Technology (+3%) led the market while Consumer Staples (-5%), Consumer Discretionary (-3%) and Financials (-2.5%) were in negative territory.

Our portfolio added value as security selection in Energy, Materials and Consumer Discretionary contributed to outperformance. Offsetting this outperformance slightly was a loss from no positions (due to expensive valuations) in the Information Technology sector (outperformed the market by ~3%).

In Energy, our positions in Crescent Point Energy (+26%), Trican Well Services (+23%) and Encana Corporation (+17%) all added value. While all companies benefited from the increase in oil prices, Crescent Point continued to recover from cheap levels as the stock has performed well in 2019 on the back of the company’s focus on reducing debt and buying back shares. We continue to favour both Crescent Point and Encana in the sector, but have been using the strength in Trican’s share price to reduce our position.

In Materials, Hudbay Minerals (+24%) and Teck Corporation (+9%) added value. Last month, Hudbay had reported in line results along with a $242M impairment charge at Rosemont given recent permitting challenges. After weak performance in November, the stock bounced back in December as both copper and gold prices, two commodities to which they have the highest leverage, performed well. Teck rallied on the reduced China/U.S. trade uncertainty, as base metal prices increased in the month (copper +6%). We continue to hold meaningful positions in both names.

In Consumer Discretionary, our positions in both Uni Select (+11%) and Sleep Country Canada (+2%) added value. Uni Select had rallied early in the month but then declined when they announced a convertible debenture financing ($125 mln) and the conclusion of their strategic review process, with no transactions being announced. While the market was initially disappointed regarding the dilution as a result of the offering, a private equity firm has taken a position in the company along with a few board positions, reflecting the value that they believe resides in the company. Sleep Country announced the launch of their transformed websites, which make it easier for consumers to shop online. In addition, they launched an online portal called SleepCommerce which allows partners of Sleep Country to have their own dedicated website, hosted by Sleep Country’s infrastructure. We continue to favour both names.

In Information Technology, our sector underweight hurt performance (outperformed the market by ~3%) as Shopify (+16% - do not own) continued to rally. We continue to view Shopify as extremely expensive (trades at 1250X current adjusted earnings and more than 460X consensus 2020 adjusted eps estimates). While the rapid rise in Shopify might remind some of Valeant’s rapid rise (before its subsequent collapse), we do believe Shopify to be a “real” company providing a valid service that is experiencing rapid growth. However, we also believe that the market is grossly underestimating the risk of competitors in the online portal hosting space and the limits this competition will place on the growth needed to justify Shopify’s current valuation, hence our reason not to own.

With Regards,

Robert Dionne

Vice President & Portfolio Manager
Scheer, Rowlett & Associates Investment Management Ltd

 

1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at December 31, 2019; e) since inception (March 29,2018). The index is 100% S&P/TSX composite Index and is computed by Ninepoint Partners LP based on publicly available index information.

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: ADR risk; Concentration risk; Credit risk; Currency risk; Cybersecurity risk; Foreign investment risk; Inflation risk; Liquidity risk; Market risk; Regulatory risk; Securities lending, repurchase and reverse repurchase transactions risk; Series risk; Small company risk; Specific issuer risk; Sub-adviser risk; Tax risk.

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