The S&P/TSX increased 10.6% with Health Care (+35%), Energy (+19%) and Financials (+17%) leading; Materials (-5%) was the only sector in the “red”.
Our portfolio outperformed as security selection in Energy, Materials, Consumer Discretionary, Real Estate and Utilities all added value. Offsetting this slightly were losses from having no positions in neither the Information Technology sector, nor the Health Care sector (as these companies remain expensive).
In Energy, Cenovus (+48%) and Enerflex (+44%) increased with the rise in oil prices and an improving outlook for a return to more normal levels of demand for oil and gas. We used some of the price strength to reduce our position in Enerflex and continue to see upside potential in both names.
In Materials, Methanex Corp. (+38%) continued to benefit from the fast paced recovery in methanol prices, on the back of the rally in oil prices. Teck Resources (+17%) rallied based on rising commodity prices. Having only one position (Oceanagold Corp. -7%) in Gold & Precious Metals added value as this sub-sector underperformed the market by 22%.
In the Industrials sectors, Westshore Terminals (+24%), NFI Group (+30%) and ATS Automation (31%) all rallied, adding value. Westshore bounced back with improved commodity prices as well as announcing improved EBIT margins for Q3 (despite lower shipping volumes) and ongoing share buybacks (have re-purchased 5% of shares this year). NFI’s Q3 earnings exceeded estimates on improved vehicle deliveries. Shares were down initially as the company warned of a slower recovery in 2021 and the company entered into discussions with banks for further covenant relief, which they are confident in obtaining. The shares rebounded with improving market confidence around bus ridership recovery, and increasing expectations that U.S. Federal funding will support the addition of electric buses in the future (which NFI produces). Finally, ATS reported their fiscal 2Q results with bookings and margins exceeding expectations as operational efficiencies from past restructuring programs begin to materialize.
In Consumer Discretionary, Great Canadian Gaming Corp. (+70%) and Linamar (+38%) rallied. Apollo Global Mgmt. made a takeover offer at $39/sh for Great Canadian. We slightly reduced our weight as we believe that the company is worth more, and continue to monitor the situation closely. Linamar’s Q3 results showed a recovery in auto and agricultural sectors, and strong free cash flow generation, and we used the strength to exit our position.
In Real Estate, H&R REIT (+39%) reported improved rent collections and solid results for Q3. New Federal rent support legislation (valid until June 2021) should help some of their tenants through the difficult business period. We continue to see upside potential in the name.
In mid November, the announcement of an imminent COVID-19 vaccine rollout gave the market a strong boost. While economic data has continued to get better (improving retail sales, industrial activity and housing sales), the level of liquidity across the major central banks has been unprecedented (US$28 trillion from across the Fed, ECB, BoJ and PBoC). The vaccine announcement seemed to be a catalyst for value stocks and the MSCI USA’s Value index outperformed its Growth counterpart by 5.4% on one day, while our Canadian Concentrated Equity fund outperformed the S&P/TSX by ~5% on the same day. As stated previously, as a bottom-up equity value manager who doesn’t believe in trying to time markets, we focus on our fundamental analysis of earnings, cash flow and book value, finding companies that will enhance shareholder and other stakeholder value over time. Despite the price improvements in our portfolio, we continue to hold names that trade at meaningful discounts to their long-term intrinsic value, so while we may be trimming some holdings, we continue to patiently hold our positions knowing that market fundamentals will likely reassert themselves in due course.
Ratul Kapur, CFA
Scheer Rowlett & Associates
Sub-Advisor to the Ninepoint Concentrated Canadian Equity Fund
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 November 30, 2020; 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.
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