Featured in Globe & Mail - msl and CRHA little old but still relevant
29 Jul 2015/National Post BY JONATHAN RATNER/Financial Post jratner@nationalpost.com Twitter.com/jonratner
Taking a global view of Canadian investing
Always attracted to the shiniest objects
Canadian dollar weakness, disappointing growth prospects and two interest rate cuts by the Bank of Canada are making many global investors fearful of Canada’s equity markets these days, not to mention the bear market in many commodities.
But it wasn’t so long ago that sentiment was pretty bullish on Canada. By early 2015, North American stocks had significantly rebounded from their lows in 2008 and investors, who had initially returned to the stable income streams provided by sectors such as REITs, were looking for higher returns elsewhere.
Now this greater risk appetite has waned once again, in large part because of the loonie’s threat to foreign investors’ returns. But Martin Braun, portfolio manager at JCClark Ltd., thinks many investors are being short-sighted, particularly in terms of currency exposure.
“Some Canadian stocks are actually American companies that just happen to be quoted in Canadian dollars,” he said.
Braun noted that a group of very hot and heavily promoted stocks — some in the micro-cap range — have been hit particularly hard during the past few months, including which is down about 55 per cent since mid-April.
“There are dozens of others, but all of a sudden when the bottom falls out and it feels like 2008, that takes the steam out of these stocks,” he said. “Unfortunately, investors are always attracted to the shiniest objects, which often aren’t of the highest quality.”
Braun’s approach in managing the JC Clark Adaly Fund, a North American equity-focused long/short fund that he started more than 15 years ago, is very much driven by bottomup fundamental analysis, including a focus on finding the best management teams.
The fund has gained roughly 17 per cent in the first six months of 2015, after a 50-percent return in 2014, and it has gained 16 per cent on an annualized basis since January 2000.
Braun tries to find companies early in their growth cycles, with one high-profile fund holding, (AYA/TSX), serving as a good example.
He bought the stock about a year before its transformational deal to acquire Poker Stars and Full Tilt Poker, which sent the stock soaring, but continues to see upside in the stock. It also does most of its business in Europe and, therefore, isn’t vulnerable to the weaker loonie.
“Even to this day, people still underestimate what a powerful franchise they now have,” Braun said, noting that many Canadians haven’t stuck with Amaya even though several U.S. hedge funds are on board. “They are moving quickly into verticals such as casino games, sports book and daily fantasy sports, and the size of those businesses are multiples of the poker business.”
Another TSX-listed fund holding, Concordia Healthcare Corp. (CXR/TSX), gets all its revenue from the U.S. Its chief executive, Mark Thompson, is the type of talent Braun looks for, and he has the market’s attention with Concordia’s pharmaceutical product roll-up strategy.
But Braun is much more bullish on top-five holding Merus Labs International Inc. (MSL/TSX), which is pursuing a similar strategy of buying drugs at a good price, and seeing the benefits of paying more attention to these products through various measures such as increased marketing.
“CEO Barry Fishman has a mini war chest of money to go and look for more pharmaceutical purchases,” he said. “The stock is inexpensive as it trades cheaper than almost any other pharma growth company in North America.”
Braun also noted that whereas Concordia’s next deal appears to be priced into the stock, that’s not the case for Merus, which is smaller and has a lower profile.
Another Canadian company focused on the U.S. market is CRH Medical Corp. (CRH/TSX), which was off the market’s radar until it made a deal in 2014 to enter the anesthesiology business.
“Overnight, the company became really investable,” Braun said, noting that the stock quickly doubled.
He explains that the U.S. market is populated by hundreds, if not thousands, of momand-pop anesthesiologists who often cater to the gastroenterologist community. But now that the government is cracking down and not allowing gastroenterologists to operate in both businesses, CRH’s strategy of making low-key acquisitions in this space is paying off.
“We like the management team a lot,” Braun said, noting the company’s chairman, Tony Holler, was the architect behind ID Biomedical, which was eventually sold to GlaxoSmithKline PLC for $1.7 billion. “They are on the right track.”