Steve Palmer, founder of AlphaNorth Asset Management, has a "buy cheap, sell dear" investment strategy that wins, as the outperforming return on one of his investment funds demonstrates. In this interview with The Energy Report, Palmer unveils a handful of resource stocks that are slumbering through the summer doldrums, gathering strength for the Fall Revival, when undervalued stocks soar.
The Energy Report: AlphaNorth Partners Fund's Class F Shares was recently ranked No. 1 in the Globefund database, with 43.4% return over five years. How have you been able to beat Standard & Poor's [S&P], the Toronto Stock Exchange Venture Index [TSX.V] and the S&P/TSX Total Return Composite? What's your secret?
Steve Palmer: We strive to be ahead of the curve on our calls. We do a lot of bottom-up stock picking-we look to identify promising situations before everyone else does. We typically invest in companies before there is analyst coverage or significant institutional ownership. We've had some decent wins with this strategy, I must say.
TER: What do you look for in under-the-radar firms?
SP: We are growth-oriented. We look at firms with a lot of upside potential and minimal downside. We like to invest in private placements, where we typically get the additional leverage of a warrant.
TER: How deeply do you investigate a company before you buy its shares?
SP: We usually meet with management before we buy shares. We do a technical analysis overlay on the stock to determine if it is a good entry point.
TER: You recently remarked that energy stocks were the best performing sector in 2014. Is that mainly due to oil and gas performance?
SP: The energy sector in Canada is dominated by oil and gas. When I made that reference, I was referring to the BMO Small Cap Index. The energy sector in that index has performed quite well year to date.
TER: What's driving that performance?
SP: Resources have been generally weak during the last three years. The energy sector is the first sector to rebound from the downturn. We are starting to see strength in the precious and base metals sectors, but energy was first to regain momentum. The price of oil has been quite strong, at over $100/barrel. In North America, natural gas inventories dropped to very low levels last winter. That caused a rebound in the price of natural gas, which has certainly helped the related energy stocks.
TER: Is that rebound also due to growth in the manufacturing base in North America?
SP: The primary driver was the inventory decline due to a very cold winter. But manufacturing is picking up with the general improvement in the economy, and that is an excellent development for energy stocks.
TER: Are the ongoing global conflicts affecting fossil fuel prices in North America?
SP: Conflicts around the world are impacting the oil price a little bit, motivating a premium. But this is not the case with natural gas.
TER: Why not?
SP: Our natural gas resources are largely sold directly into the North American market. Elsewhere in the world, natural gas can be significantly more expensive. In China and Japan, for instance, natural gas consumers are paying approximately $12/thousand cubic feet [$12/Mcf], which is three times the amount that North American consumers are paying.
TER: How will exporting natural gas from Canada and the U.S. affect global prices?
SP: Over the longer term, we will see a convergence in the price if liquefied natural gas [LNG] becomes pervasive. It will be arbitraged out, just like oil. You can transport oil anywhere; the price is generally the same throughout the world. It will be the same with gas.
TER: You have been consistently bullish on graphite. Why?
SP: The markets for graphite are growing tremendously. One of the major areas of growth in graphite demand is for use in batteries, and the electric car is experiencing an upsurge of growth.
TER: Why will the junior markets heat up in the fall?
SP: Simply put: Summer is normally a slow period for the stock markets. A lot of people are away, so many companies hold back news until people are back at their desks in September. Volumes are light.
TER: What's your outlook for base and precious metals?
SP: The short story is that the junior metals market in Canada has been in a significant downtrend since the spring of 2011. Since then, the TSX.V has lost almost two-thirds of its value. The performance rebound started first with technology and life sciences companies, followed by the energy sector. Base and precious metals are the last two sectors to rebound from the historic downturn, and they are set to explode going forward, in our opinion.
TER: During the long downturn in gold, have you held on to junior gold stocks, or are you in and out of the market with the juniors?
SP: We sold a lot of our junior precious metal holdings awhile back. For several years, we have not played much in the gold space. It got very overheated, with the consensus view that gold was going to multi-thousands of dollars an ounce. We disagreed and focused on other areas. This was the right call and turned out well for us.
TER: The AlphaNorth funds have performed extraordinarily well. Are there certain sectors that you concentrated on?
SP: Our success is due to a combination of factors. We try to sell at the right time to maximize our gains. During the downturn, we minimized damage in sectors like precious metals and the resource commodity space. We were among the first to invest in sectors that have performed great, like the life sciences and technology. We have had good success in bottom-up stock-picking. We have been fortunate to have picked some well-positioned, cheap stocks and sell them at the right time.
TER: For H2/14, do you have any advice for investors in terms of portfolio investments?
SP: This summer lull that we are currently experiencing is a great time to invest, because the stock markets will likely reenergize in the fall. There is going to be a rotation into resource juniors that have not performed. Positive returns follow well-measured risk.
TER: Good talking to you, Steve.
SP: Thanks for your interest.
This interview was conducted by Peter Byrne of The Energy Report and can be read in its entirety here.
Steve Palmer is a founding partner, president and chief investment officer of AlphaNorth Asset Management, and currently manages the AlphaNorth Partners Fund, AlphaNorth Growth Fund and AlphaNorth Flow-Through LPs. Prior to founding AlphaNorth in 2007, Palmer was employed as vice president at one of the world's largest financial institutions, where he managed equity assets of approximately CA$350M. Palmer managed a pooled fund, which focused on Canadian small-capitalization companies, from its inception to August 2007, achieving returns that were ranked No. 1 in performance by a major fund-ranking service in its small-cap, pooled-fund category. He also managed a large-cap fund, which ranked in the first quartile of performance among other Canadian equity-pooled funds. Palmer earned a bachelor's degree in economics from the University of Western Ontario and is a Chartered Financial Analyst.
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