Markets fell sharply in late January as investors feared the Greek Government might default on its debt. After dropping more than 6%, markets rallied on the back of positive job numbers for the remainder of Q1. Through the quarter, the S&P/TSX Composite returned 3.1% while the S&P 500 (CAD) returned 2.3%.
In Canada, the top performing sectors for the quarter were health care (+10.3%) and financials (+8.1%) while energy (-2.0%) and consumer staples (+0.2%) lagged the index. The spot price for gold fell 1.5% to $1,131USD/oz. while the benchmark crude oil future rose 2.5%.
Financial services returned 8.1%, driven by positive performance by diversified banks (+8.8%) and insurance (+6.5%).
Q1/10 MAJOR PORTFOLIO ACTIVITY
PURCHASES:
Industrial Alliance Insurance and Financial Services – quality management team, fast growth vs. peers, well capitalized, purchased at discount to market price.
NuVista Energy Ltd. – strong balance sheet, initiation of quarterly dividend supported by cash flow strength and self-funded 2010 drilling program.
SALES:
RioCan Real Estate Investment Trust – couldn’t increase payout and was fully valued.
Yellow Pages Income Fund – good yield but limited upside without a strong cyclical rebound.
KEY CONTRIBUTORS:
TD Bank – earnings beat expectations, valuation catching up to peers.
Telus Corp. – ARPU starting to rebound, valuation metrics caught up to peers.
KEY DETRACTORS:
Uni-Select Inc. – poor earnings from US division.
Talisman Energy Inc. – known for shale gas and the stock price was affected accordingly by weak gas price.
Looking forward, we see a continued global recovery led by the emerging nations. Recovery in developed countries will be tempered by slower full-time job growth and weak consumer demand. In Canada, the hard commodity story is still intact as Chinese and Indian demand for base metals and oil remains strong. We expect the BOC to raise rates towards the end of Q2 or in early Q3 with the US following suit later in the year.
STONE & CO. FLAGSHIP GROWTH & INCOME FUND CANADA
Markets fell sharply in late January as investors feared the Greek Government might default on its debt. After dropping more than 6%, markets rallied on the back of positive job numbers for the rest of Q1. Through the quarter, the S&P/TSX Composite returned 3.1% while the S&P 500 (CAD) returned 2.3%.
In March, government interest rates appeared to be breaking out of the well-defined range in which they traded since early Q1. Also, interest rate curves began to flatten as central banks increased rates. Ten-year Government of Canada yields have been in a 3.30-3.60% trading range since January. By quarter end, yields were pushed to the higher end of this range. Government bond prices have consistently been trading with a bias of lower highs and lower lows. Shorter dated government bonds have underperformed longer dated bonds as yields have risen.
Q1/10 MAJOR PORTFOLIO ACTIVITY
PURCHASES:
None.
SALES:
RioCan Real Estate Investment Trust – couldn’t increase payout and was fully valued.
Yellow Pages Income Fund – good yield but limited upside without a strong cyclical rebound.
KEY CONTRIBUTORS:
TD Bank – earnings beat expectations, valuation catching up to peers.
Baytex Energy Trust – smaller than forecast heavy oil differential from increasing demand caused earnings to be higher than expected.
KEY DETRACTORS:
Cameco Corp. – low uranium price and mining costs at CigarLake expected to be higher than initially projected.
Talisman Energy Inc. – known for its shale gas and the stock price was affected accordingly by weak gas price.
Looking forward, we see a continued global recovery led by the emerging nations. Recovery in developed countries will be tempered by slower full-time job growth and weak consumer demand. We expect the BOC to raise rates towards the end of Q2 or in early Q3 with the US following suit later in the year.
The fixed income (FI) component of the Fund remains overweight in the telecom, cable, energy and media sectors. Portfolio duration was reduced over the past month from 7.32 to 6.70 years. The FI team anticipates a further reduction in the portfolio duration in Q2. However, over the longer term they do not believe that the global economy can sustain higher yields for a prolonged period and they expect some contraction in interest rates.
STONE & CO. FLAGSHIP STOCK FUND CANADA
Markets fell sharply in late January as investors feared the Greek Government might default on its debt. After dropping more than 6%, markets rallied on the back of positive job numbers for the remainder of Q1. Through the quarter, the S&P/TSX Composite returned 3.1% while the S&P 500 (CAD) returned 2.3%.
The top-performing sectors for the quarter were health care (+10.3%) and financials (+8.1%) while energy (-2.0%) and consumer staples (+0.2%) lagged the index. The benchmark crude oil future rose 2.5%. The US Fed raised the discount rate by 0.25% to 0.75%, while the BOC kept the target overnight rate unchanged at 0.25%.
Q1/10 MAJOR PORTFOLIO ACTIVITY
PURCHASES:
Gran Tierra Energy Inc. – strong position in Columbia, strong balance sheet with additional credit facilities, excellent history of production growth.
CN Railway Co. – proven track record of industry-leading financial ratios and full pension plan, not directly exposed to commodity prices though we see volumes persisting, ensuring a reliable revenue stream for CNR.
Bioexx Specialty Proteins Ltd. – shipments to commence in Q2 and increase through 2010.
SALES:
Total Energy Services Inc. – stock price increased as the market valued current oil levels into service companies; sold to take profits.
Canadian Tire Corp. – same store sales down 9%, and earnings not at expected levels.
KEY CONTRIBUTORS:
Questerre Energy Corp. – joint venture with one of Talisman’s shale gas properties with good drill results.
Open Text Corp. – positive earnings surprise.
KEY DETRACTORS:
Telvent SA – negative earnings surprise.
EnCana Corp. – affected by poor Natural Gas price trends.
Looking forward, we see a continued global recovery led by the emerging nations. Recovery in developed countries will be tempered by slower full-time job growth and weak consumer demand. We expect the BOC to raise rates towards the end of Q2 or in early Q3 with the US following suit later in the year.
STONE & CO. GROWTH INDUSTRIES FUND
Markets fell sharply in late January as investors feared the Greek Government might default on its debt. After dropping more than 6%, markets rallied on the back of positive job numbers for the remainder of Q1. Through the quarter, the S&P/TSX Completion index returned 5.2% while the S&P 400 MidCap (USD) returned 9.1%.
The top-performing sectors for the quarter were health care (+10.3%) and financials (+8.1%) while energy (-2.0%) and consumer staples (+0.2%) lagged the index. The benchmark crude oil future rose 2.5%. The US Fed raised the discount rate by 0.25% to 0.75%, while the BOC kept the target overnight rate unchanged at 0.25%.
DHX Media Ltd. – undervalued based on product line, conservative balance sheet, own the rights to world’s #1 children’s show.
SALES:
Arcan Resources Ltd. – price increased rapidly and stock was sold to take profits and increase average market cap of the Fund.
Route 1 Inc. – underperforming and no near-term catalyst.
KEY CONTRIBUTORS:
Total Energy Services Inc. – stock price increased as the market valued current oil levels into service companies and was sold to take profits.
Seacliff Construction Corp. – well positioned with a solid balance sheet but previously lagged peers. Markets began recognizing their strength.
KEY DETRACTORS:
Dragonwave Inc. – doubts surfaced about the company’s future growth potential.
Medicago Inc. – lack of a catalyst to increase share price.
Looking forward, we see a continued global recovery led by the emerging nations. Recovery in developed countries will be tempered by slower full-time job growth and weak consumer demand. In Canada, the hard commodity story is still intact as Chinese and Indian demand for base metals and oil remains strong. We expect the BOC to raise rates towards the end of Q2 or in early Q3 with the US following suit later in the year.
STONE & CO. RESOURCE PLUS CLASS
Markets fell sharply in late January as investors feared the Greek Government may default on their debt. After dropping more than 6%, markets rallied on the back of positive job numbers for the remainder of Q1.
The benchmark crude oil future rose 2.5%. The US Fed raised the discount rate by 0.25% to 0.75%, while the BOC kept the target overnight rate unchanged at 0.25%. The materials sector advanced 0.3% driven by diversified metals up over 12% but offset by gold names down 6.5%.
Q1/10 MAJOR PORTFOLIO ACTIVITY
PURCHASES:
Monterey Exploration Ltd. – uses horizontal drilling and multi-stage fracture simulation, owns property near active holdings of big oil cos., purchased through equity financing.
Imperial Oil – increasing exposure to large-cap oil companies.
West Energy – strong balance sheet, no debt, and excellent balance of dependable production.
SALES:
Base Oil & Gas Ltd. – selling smaller names to increase Fund’s average market cap.
Victory Nickel – selling smaller names to increase Fund’s average market cap.
KEY CONTRIBUTORS:
Petrominerales Ltd. – continues to achieve excellent results through drilling plan.
KEY DETRACTORS:
Clifton Star Resources Inc. – potential takeover premium had been priced into stock with joint venture partner Osisko until Osisko announced a takeover offer for Brett Resources Inc.
Looking forward, we see a continued global recovery led by the emerging nations. Recovery in developed countries will be tempered by slower full-time job growth and weak consumer demand. In Canada, the hard commodity story is still intact as Chinese and Indian demand for base metals and oil remains strong. We expect the BOC to raise rates towards the end of Q2 or in early Q3 with the US following suit later in the year.
STONE & CO. EUROPLUS DIVIDEND GROWTH FUND
European equity markets continued their upward momentum during Q1 2010, rising 4.3% in local currency terms. Despite this strong performance, currency weakness, on the back of European sovereign debt worries, curtailed performance in CDN dollars. This resulted in the benchmark MSCI Europe (CAD) index falling -4.4% during Q1.
The only positive sector performance was by IT, returning +7.1%. The worst performing sectors were Utilities, Telecoms and Energy, falling -10.8%, -9.0% and -7.7%, respectively.
Country-specific performance was, unsurprisingly, dominated by the sovereign debt fears surrounding several Mediterranean nations. The now-infamous quartet of Portugal, Italy, Greece and Spain posted negative returns over Q1.
Q1/10 Major Portfolio Activity
PURCHASES:
Alstom – strong player in an unloved sector led to an attractive valuation anomaly.
GlaxoSmithKline – cheap valuation, high and sustainable dividend yield, and defensive revenue stream.
SALES:
Sandvik – exited on valuation grounds following a strong recovery.
Wincor Nixdorf – achieved target price.
Flughafen Wien – capex overruns created an unfavourable risk/reward balance.
KEY CONTRIBUTORS:
Nokia /– good Q4/2009 results boosted sentiment.
Restaurant Group – rose after a strong set of results and a confident outlook.
KEY DETRACTORS:
Santander and BBVA – macro worries impacted sentiment towards the Spanish banking sector.
European markets have rallied hard from the lows recorded just over a year ago. While the 2009 nadir reflected a significant lack of confidence in the future of the financial system, the subsequent recovery reflects impressive faith in the ability of the system to shrug off the many residual challenges. As bottom-up investors, we are happy with the quality and valuation of our portfolio holdings, but remain cautious towards those areas of the market dependent on a more benign macro-economic environment going forward. Consequently, we remain underweight financial and mining stocks, and overweight consumer staples and cash.
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Stone & Co. Quarterly Commentaries Q2/2010
Jun 15 2010
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