Despite their current popularity, interest rate-sensitive businesses lack “the underlying fundamental momentum” that drives strong performance over the long term, says David Picton, president and portfolio manager for Canadian equities at Picton Mahoney Asset Management, one of three managers of the Renaissance Canadian Growth Fund.
So he stays away. Instead, Picton suggests focusing on companies that are supported by positive change factors. These factors include “estimate revisions, earnings surprises and growth-rate acceleration, which are all strong drivers of performance.”
He notes, “Dividend yield as a factor has been a middling-to-lesser driver of performance.”
So investors can look at whether a company is “accelerating or improving compared to the rest of the marketplace. Unfortunately, there [aren’t] a lot of interest-rate sensitive [companies] that fit into that category.”
Where to look for opportunity
Canadian telecom is one sector Picton won’t buy right now, as there’s little earnings growth and increased competition. “Our telecom sector trades at one of the highest valuations in the world, and is only now beginning a competitive phase. Most of the other companies around the world have already [emerged from] their competitive phase.”
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Instead, he looks for sectors where fundamental change is occurring. “On a cyclical basis, [this tactic] actually favours some of the later-cycle companies. Companies in the energy space, for instance, have gone through a lot of difficult times over the past 18 months. We’ve seen energy prices getting closer to a balancing point with supply and demand.”
When balance is restored, he adds, oil prices will rise to between $50 and $60, improving from marginal to strong, and that will boost energy names–as of Aug 16, 2016, WTI and Brent Crude were sitting at around $46 and $49, respectively.
Further, “If you look at natural gas-related companies — which we own a lot of in Canada in the Montney region — you’re already seeing very strong operating momentum, combined with the backdrop of potentially higher prices.” Names that Picton likes in the natural gas space include ARC Resources, Crew Energy and NuVista Energy.