Caldwell North American Equity Strategy – Monthly Update August 31st, 2014
We did not add any new positions to the portfolio this month.
We did not eliminate any positions from the portfolio this month.
Company Updates: A Few Highlights
Canadian Investors are Over-Exposed to Energy
Studies on behavioral finance have brought to light common biases that negatively impact investor results. One of these is the home country bias, where investors allocate a high proportion of their investments to their home country. This should be concerning to Canadian investors given the high level of energy-related commodity risk in Canada—while the energy sector alone accounts for 25% of Canada’s stock market, the significance is even greater when one accounts for the many companies that indirectly benefit from the development of Canada’s energy resources (bank financings, rail and trucking logistics, temporary workforce accommodations, real estate developers, electricity providers, Western-based telecom companies, etc.).
While we have been mindful to limit and be selective in our energy exposure, our ability to invest in the U.S. market is a tremendous benefit of our investment process as it allows diversification away from energy-related commodity risk. This is particularly evident with recent weakness in energy prices, where crude oil and natural gas are both down 15% from recent highs. The U.S. also allows us to participate in major business sectors like technology, health care, and consumer products, which collectively account for 55% of the U.S. market versus only 13% in Canada.
A strategy that has worked well for our investors is taking advantage of situations where the market is overly focused on the short term. We think this is currently the case at Onex. The company’s goal is to grow the value of its business by 15% each year, which is primarily achieved through the increase in value of investments Onex makes in private companies. While investment performance has been strong, Onex has been selling more investments than it has been buying, causing concerns that the increasing amount of cash (which will make up approximately half of the company’s value) will make it difficult to reach the 15% return target (effectively, the company has to make 30% per year on their current investments). While the concern is valid, we believe it is short term in nature given the company’s strong track record of making successful investments and management’s recent comment that they have seen a meaningful pickup in their pipeline of investment opportunities. We believe any announced investments will act as strong catalysts for the shares moving higher.
Sentiment on Cisco continues to improve as the company reported better than expected results. While the outlook remains cautious, particularly outside of the U.S., there are increasingly positive signs that customers continue to value Cisco’s products and services. From a valuation perspective, Cisco is one of the cheapest stocks in the market today, trading at less than 9x earnings when accounting for the cash on their balance sheet.
Investment Management Team