Category: Weekly Commentary

16 Mar 2018

Issue 11 – How ‘Bout Them Magnets

The market for rare earth elements (REEs) is set to grow significantly in the coming years. Many research reports are forecasting global demand for these elements to double by 2020. The growth wave is coming from clean energy applications such as wind power. However, the electric vehicle revolution is the largest emerging market for these products. Palos believes that this is a significant change that should not be ignored.

The REEs are primarily refined into two elements neodymium and praseodymium, also known as NdPr. The NdPr is then shipped in oxide form and used to make the lightweight neodymium-iron-boron also known as NdFeB. The NdFeB is the magic ingredient necessary to make permanent magnets inside high-efficiency motors and turbines. Many auto makers like Tesla are using permanent magnet motors because they are lighter, stronger and more efficient. For example, the Tesla Model 3 long range model, probably the most famous EV vehicle on the market, uses permanent magnet.

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09 Mar 2018

Issue 10 – Pollard Banknotes Wins Big

There are over 200 lotteries that operate around the world that source their supply of lottery tickets from just a handful of companies. Pollard Banknotes (TSX:PBL), is one of three instant lottery ticket vendors in North America. PBL is growing significantly faster than its competitors and has been recognized by the industry for its “game changing” innovations. Pollard sells instant scratch tickets to 12 of the top 20 global lotteries and has 50 lotteries signed to long term contracts with renewal options. In 2017, PBL continued to improve its operations with the purchase of a new printing press that has had a positive impact on the company’s margins and printing capacity.

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02 Mar 2018

Issue 9 – Why we Love Canada!

Many economist and strategies on the sell side are bearish on Canada. Their reasoning mostly comes from the overvalued housing market, Canadian indebtedness, and the lack of Canadian energy infrastructure. Palos believes this argument has merits which have lead to negative sentiments on the TSX. These potential headwinds have the TSX is trading at a 2018 forward P/E of 15.16x and a 2019 forward P/E of 13.73x. This compares to S&P 500 that is trading at a 2018 P/E of 17.36x and a 2019 P/E of 15.74x. In our view, the negative sentiment has gone too far. Economists and strategists are ignoring Canada’s favourable positioning on the four great revolutions. Moreover, most Canadian companies that are listed on the TSX have grown their operations in the US and around the globe.

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23 Feb 2018

Issue 8 – No Love for the Bank of Nova Scotia

The Bank of Nova Scotia (TSX:BNS) has been significantly underperforming its peers since January 31, 2018. Palos believes this underperformance is primarily due to NAFTA fears. In our view, this fear is overblown and ignores the bank’s fundamentals and growth opportunities. If Canadian interest rates continue to rise, banks will benefit from margin expansion. However, higher rates are a double-edged sword. With rising rates, you can expect loan originations to slowdown in Canada. Canadian Banks that have low international exposure will struggle to grow their loan book.

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15 Feb 2018

Issue 7 – The Liquor Stores Getting Ready to Distribute Cannabis

On November 30, 2017, I wrote about Liquor Stores N.A. (TSX: LIQ) and stated that the company had a significant opportunity to expand into the cannabis retail market. On February 2, 2018, Aurora Cannabis (TSX: ACB) announced that it will be buying a 19.9% stake in LIQ at a 28% premium ($15.00/share) through a non-brokered private placement. This $103.5 million cash injection has enabled the company to rid its balance sheet of debt and aggressively move forward with Canadian store renovations. This deal will allow LIQ to concentrate on the cannabis retailing opportunities.

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09 Feb 2018

Issue 6 – The Stock Market & U.S. Energy Complex

On most days, no one knows why stocks are up or down. This is particularly true with sudden market moves. I hate to admit it, but we should have seen this one coming. After hitting its highest level in a decade, household confidence in the economy slipped for the third month in a row in January. The University of Michigan’s index is 1.1 points below the 2017 average of 96.8, which was the highest yearly average in two decades. Put simply, it is normal to feel a little less confident about the economic outlook when things are already as good as it gets.

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02 Feb 2018

Issue 5 – N’oubliez Pas! / Don’t Forget!

(English to follow)

 Comme la période des déclarations de revenus arrive à grands pas, je profite de l’occasion pour vous rappeler de tirer pleinement parti de vos comptes de placement à l’abri d’impots en cotisant à votre REER et à votre CELI avant la date limite. Ces régimes sont des moyens très efficaces d’épargner en vue de la retraite et d’autres objectifs à long terme, tout en économisant de l’impôt. Vous trouverez ci-dessous des renseignements supplémentaires.

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26 Jan 2018

Issue 4 – India Exposure via the Experts

Palos believes that India is one of the top jurisdictions in which to invest. India ranks third in terms of preferred investment destinations, just after China and the United States. India has emerged as one of the most attractive destinations not only for investment, but also for doing business. It’s also one of the fastest growing economies in the world. Here are a few highlights which in our view make India a top investment theme for the coming years:

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19 Jan 2018

Issue 3 – The New Kid on the Block

In late 2017, Scotia Capital launched an Initial Public Offering (IPO) for Neo Performance Materials Inc. (TSX: NEO). The deal was done at $18.00 and the stock started trading on December 8, 2017. It was not well received and traded below its issue price on opening day. Palos has a different view on NEO. The Funds participated in the deal and we strategically kept some powder dry to buy more shares in the open market if the issue dipped below issue price.

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12 Jan 2018

Issue 2 – What Worked and What did not Work in 2017

In 2017, the Palos Income Fund LP was up 12.53% whereas the S&P TSX composite was up 9.10%. The fund generated a positive alpha of 3.43%. It’s important to note that the fund’s performance did not come from taking more risk. The funds value at risk (VAR) was equivalent to that of the TSX during the year, in addition, the fund’s beta was also lower than that of the TSX.  On a risk reward basis, Palos is pleased with its performance for 2017. However, as managers, it’s important to analyze what did and did not work during the year.

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05 Jan 2018

Issue 1 – The 2018 Stock Market Outlook

We’ve entered the new year with near record peaks in all U.S. stock indices running circles around most money managers. The bull market is on track to mark its ninth birthday in March of 2018, even with the S&P 500 climbing 18% in 2017. In fact, market internals like breadth indicators show broad-based participation arguing against a major top. Since 1945, the average trailing 12-month P/E ratio has been 17.5. History shows that six of the last 15 bear markets came from below-average P/E ratios. There is no threshold level that, once breached, gives investors a clear signal to get out. Furthermore, the level of interest rates does not offer much help either. Accordingly, there is no specific relationships between bear markets and valuation.

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15 Dec 2017

Issue 50 – Happy Holidays

Dear clients, friends, employees and suppliers of Palos, we want to wish you all the very best over the holiday season. Most importantly, we would like to thank you for your trust and loyalty over the years. We greatly appreciate everything that you have done for Palos.

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08 Dec 2017

Issue 49 – Back on the Train

Canadian Energy companies are suffering from a lack of pipeline infrastructure. Canadian producers have become price takers as they have no flexibility to move oil to the market with the best price. However, when the differential between Canadian and U.S. oil rises above a certain spread, it becomes economical to send oil by rail around North America. The spread has now reached its tipping point and producers are now once again shipping oil by rail. Moreover, railroad companies have been discounting some shipments. For example, a trip to Texas can costs about $12 a barrel, compared with $10 via pipeline.

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01 Dec 2017

Issue 48 – Liquor Stores Getting Back on Track

Liquor Stores (TSX:LIQ) went public as an income trust in 2004 and quickly became a market darling. The company used its lofty valuation to make acquisitions and quickly became one of the largest liquor store operators in Western Canada. The opportunities quickly dried up in Canada, and the company went to the United States to seek greener pastures. The lack of discipline quickly got the company into trouble. LIQ’s payout ratio, debt level, and inventory management got out of control and became a serious drag to the company.

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24 Nov 2017

Issue 47 – Tax Selling Brings Black Friday Sales

The worst performing sector in 2017 is officially energy. Every segment in the sector is underperforming the broader market. The stock performance of the majority of all midstream, services, or producer companies has been negative. Most sectors in Canada and in the U.S. have achieved positive performance numbers this year. It is fair to assume that many investors realized significant capital gains in those sectors during the year. As November tax planning takes priority over fundamentals, this brings further selling to an already oversold energy sector. Investment opportunities arise as quality energy names are trading at historical discounts.

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