Jason Mann, co-founder and chief investment officer at EHP Funds his top picks: Whitecap Resources, Zendesk, and Linamar.Clearly over the last few years or so you could have picked just about any energy stock and returns would have been remarkable. After a five-year bear market , it’s clear that the world is now short on energy in all forms, and oil has become a key driver of inflation.
Whitecap is a western Canada producer, predominantly light oil. Like many energy companies, it screens as very cheap, 1.6x EV/EBITDA, 5.9x cash flow, decent yield at 4.4 per cent and a very low payout ratio. Despite energy weakness in June and July, it is rebounding again and price momentum is still stronger than in other sectors.
We think the stock can play catch up though as they deliver the cash flow and de-lever, and it’s trading at a meaningful discount to its Montney peers.This one is a merger arbitrage pick, which is one of the strategies we use in our funds, where we earn a return by buying stocks in the process of being acquired at a discount to the price we’ll eventually get once the merger closes.
Situations like these can be attractive as you have a firm deal and a return to that price, with “free” optionality that a market rally or activist shareholders encourage a bump to the price to get the deal done.Linamar has been a holding for us a number of times over the years, but like many cyclical stocks there are times we want to avoid it and times we want to own it. We think despite the economic softening, Linamar is attractive here.
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