Don't panic, because things can't get much worse.
Instead, hold your cards and scout out buying opportunities. This is the
strategy Steve Palmer employs at AlphaNorth Asset
Management, a small-cap powerhouse with a track record of solid returns. In
this exclusive interview with The
Energy Report, Palmer gives a quick-and-dirty
assessment of resource markets and explains why he now favors energy stocks
over precious metals in the current environment.
Report: Steve, AlphaNorth created
quite a stir when it returned 160% in 2009 and 113% in 2010. But this year's
second quarter has seen negative returns. What do you attribute this to?
Steve Palmer: It's
hard to generate positive returns when stocks across the board are a no bid.
The small-cap Canadian market has been hit pretty hard. There's zero investor
interest right now, particularly in small-cap resource companies. I do expect
things to get better, though, over the remainder of the year.
the current market downturn unusual?
market is cyclical; every once in a while people head for the hills. The
current downturn is related to concerns about Europe and the slowing of
growth in China. My view is that concerns about Europe are overdone. There is a slowdown in Chinese
growth, but it has been a policy-driven slowdown by the government to cool
inflation and the housing market. That policy has been successful, but now
investors are complaining about the slower growth. Going forward, the Chinese
government will be implementing policies to reaccelerate the growth rate, now
that inflation is not an issue. Meanwhile, China continues to increase its
energy consumption. The latest data shows that the country's oil imports are
up 11% year-to-date.
do AlphaNorth funds weight the resource sector?
take a balanced approach. The Partners Fund is 50/50 in resource stocks
versus tech and healthcare stocks. Our Growth Fund has a higher resource
weighting; it is currently above 70%. But that has not been good for
performance in the short term, given that small-cap and midcap resource
stocks have been hit the hardest over the last few months.
do you focus on small-cap equities?
Historically, small-cap equities are the best-performing asset class over the
long term. They are more volatile than fixed-income investments or large-cap
equities, but they generate far superior long-term returns. One reason for
this is that small caps are often priced inefficiently. I try to buy
companies that do not have any analyst coverage or institutional ownership.
Getting in early can mean multiplying your money many times.
does AlphaNorth exploit inefficiencies in small-cap
It's based on risk versus reward. We try to identify situations that have
limited downside with lots of leverage to the upside.
do you limit your portfolio to Canadian firms?
There are enough opportunities in Canada that we don't have to go looking
internationally. I'm more familiar with the players in the Canadian market
and how things work here, as compared to the U.S.
you favor investing in energy juniors over gold and other mining juniors in
the current international economic environment?
the current environment, I prefer energy to gold. Small- and midcap energy
stocks currently offer better value than gold stocks. There's still some
euphoria priced into gold by retail investors. Furthermore, energy is a
finite resource. Once it's gone, it's gone. Gold, on the other hand, is not
consumed; it sits around forever. However, I think both will do well over the
balance of the year.
Steve, you have been a strong proponent of uranium stocks in the past. Given
the current economic climate, what upside is there for uranium? Are there any
uranium juniors that you like?
Uranium has been off the radar for a while because the situation in Japan has
been a big negative for uranium companies. But I believe that the Japanese
nuclear reactors will be restarted. In addition, China has a program to
expand its nuclear energy infrastructure quite significantly. Over the longer
term, uranium should do quite well. A micro-cap name we like is Athabasca Uranium Inc. (UAX:TSX.V; ATURF:OTCQX). It is one of
the better small caps in terms of its potential to find an economic deposit
in Canada. Denison Mines Corp. (DML:TSX; DNN:NYSE.A) is a
larger-cap name that also has good prospects.
Shifting to oil and gas, what regions in Canada are the most promising for
Canada is a mature basin for energy. The most exciting opportunities are
those companies that are exploiting new extraction techniques. New fracking technologies and horizontal wells have opened up
areas that were previously uneconomic.
do you assess takeover potential for energy juniors in Canada?
look at the potential value of the company's asset relative to some of the
larger companies nearby and whether or not it will be a strategic acquisition
for them. Quite often, larger companies acquire land surrounding an area
where a junior company already owns land. Therefore, land value can imply a
significantly higher market cap for the junior company.
you have any advice for investors who are looking at junior equity stocks in
Canada? Should they hold their cards, or go looking for cheap investments?
is a tough market environment. The TSX Venture index is down over 50% since
March of last year. There have been very few winners for anybody. I see a
similar situation to 2008 in the small-cap environment, where investor
sentiment is extremely negative. But that's also a positive sign because it
can't really get much worse than it is. That's why I'm quite optimistic about
the market going forward.
should not be panicking and selling. Generally, almost all of the junior
resource companies are trading at attractive levels. If the market rallies,
as I expect, everybody will benefit.
point is that it's been a very challenging market for investors in the junior
energy space. This is not the time to abandon those investments. There may be
some firms that are at risk of not getting further funding, and there's
potential for some to go bankrupt. Stick with the good ones that are funded
with strong management teams, and wait for the market environment to improve,
as it surely will.
Thank you, Steve.
CFA, has served as president, CEO and a director of AlphaNorth
Asset Management since founding the firm in 2007. AlphaNorth
currently manages a long-biased, small-cap hedge fund. As VP of Canadian
equities at one of the world's largest financial institutions, Steve managed
assets of approximately $350M. He also previously managed a small-cap pooled
fund, achieving returns ranked #1 by Morningstar Canada. He has a BA in
economics from the University of Western Ontario.
Want to read
more exclusive Energy Report
interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have
been published. To see a list of recent interviews with industry analysts and
commentators, visit our Exclusive
1) Peter Byrne of The Energy
Report conducted this interview. He personally and/or his family
own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report:
Athabasca Uranium Inc. Interviews are edited for clarity.
3) Steve Palmer: From time to time, Streetwise Reports LLC and its directors,
officers, employees or members of their families, as well as persons
interviewed for articles on the site, may have a long or short position in
securities mentioned and may make purchases and/or sales of those securities
in the open market or otherwise. I was not paid by Streetwise Reports for
participating in this interview.