Market Call – Michael Sprung Interviewed by Michael Hainsworth on BNN
Michael Hainsworth: Hello! I am Michael Hainsworth. Welcome to the one hour edition of Market Call! We have got Michael Sprung here, President of Sprung Investment Management, taking your calls, emails, and tweets on Canadian stocks.
If you have got a question, we have got a line available for you right now. It’s 1-855-326-6266. You can email [email protected] or follow me on Twitter and send off a tweet.
Michael, welcome back to the program!
Michael Sprung: Well, it’s good to be here on a nice summer day.
Michael Hainsworth: Yes, it’s been quite heated over the course of the last week, as have the markets. You tell your clients that we are in reactionary times. How do we play that?
Michael Sprung: Well, I think one has got to be prepared to see a lot of volatility in the markets, and that’s been very, very evident over the last couple of months. Every time the Federal Reserve speaks we have a market reaction that seems to take things to an extreme.
So Mr. Bernanke hints at the possible end of QE. I mean, that could possibly have been good news. People could have said, gee, the economy is getting strong enough, maybe it could be self-sufficient from here. But instead, they said, well, maybe the recovery is not strong enough to carry on without all this stimulus and therefore we had to run out of the market, and then the next thing we know he would say, well, perhaps not just yet.
And then we have in Canada of course the Bank of Canada saying, we will be in a low interest rate environment as long as the economy looks like it is. It’s just limping along, and until we see more evidence of underpinnings in the recovery, it will likely remain so.
So I think to some extent people are depending too much upon sort of the short-term noise here. I mean, the fact is that what we are seeing is we are seeing a recovery in the U.S. or some evidence thereof. We are seeing gradual, but more employment. We are seeing a recovery in the housing sector, although nothing goes in a straight line. It can be somewhat spotty.
Overall, I think we are seeing more optimism with respect to the outlook for consumer spending and so on going forward.
So I think that although if you look at a global environment, our expectations for growth this year have been somewhat dampened, still overall we are looking for positive global GDP growth; Europe being the big exception. And in that environment I think people can take advantage of this sort of volatility and pick their spot.
So when you see markets come down very rapidly and a lot of the good stocks come down with the weaker ones, that’s the time that you should have some cash on the sidelines and be prepared to step in.
Michael Hainsworth: So then we see market weakness, that gives you the opportunity to pick your spots as you point out, how do you go about choosing which spot is an appropriate one to pick?
Michael Sprung: Well, since this could be a rather prolonged period here, I think that you have to be very, very choosy in terms of picking stocks that are, A, financially strong, that have the financial wherewithal to go through a relative weak period for demand, particularly in the commodity side.
I mean, we have seen materials this year, we have seen them hit particularly hard. We are seeing some recovery now in the energy stocks, but I suspect that as long as you pick those players that are likely to be the acquirers or the survivors, you will do quite well over the next business cycle.
Michael Hainsworth: Well, let’s take a break and come back. I have got an email on the energy sector. We will take that one right at the start of the program.
Michael Sprung: Sure!
Michael Hainsworth: All right! We have got Michael Sprung here. He is the President of Sprung Investment Management. We are talking about Canadian stocks at 1-855-326-6266. We have got a line available for you right now.
Michael Sprung is here, President of Sprung Investment Management. We are talking about Canadian equities at 1-855-326-6266. [email protected] is an alternative way to get a hold of us. That’s what Brian did so today.
CNQ vs. BTE, he writes, “I am looking at investing in a Canadian oil exploration and development company. Do you think Baytex has better prospects for share appreciation over the short-term? Is it as safe a bet as CNQ for longer term appreciation excluding dividends?”
Michael Sprung: Well, for longer term appreciation I would certainly look at CNQ, and I think even in the short-term, on a relative valuation basis, even though CNQ has had somewhat better performance over the last period than Baytex has, I would still lean towards CNQ.
You are looking at similar levels of profitability currently, but you are paying much less in terms of price to book. What you are paying for that profitability is less I think in CNQ than what you are paying in Baytex currently.
They are both very well-managed companies, but the other thing I would say is that CNQ, their payout ratio is a lot lower than what you see at Baytex. Baytex is one of the stocks that started out, as I recall, originally as an income trust, and they have carried on with a very high payout.
And hence, if you are buying it for yields, you would naturally be attracted to that, because I believe their yield is still in excess of or close to 5% or so, whereas it’s much less so in CNQ. But then again, Canadian Natural Resources actually earns their distribution and doesn’t depend on paying it out of just cash flow. So that’s a much longer term sustainable stock to own.
Michael Hainsworth: I am seeing $40 targer prices over the course of the next 12 months. Do you see 13% upside from here?
Michael Sprung: It could well be. I mean, a lot of this is going to be a function of the shorter term price of the commodities and so on. I do like Canadian Natural Resources. We don’t own it currently, but it’s certainly one that we would own at the right time.
Michael Hainsworth: What is the right entry point if it isn’t 34 and change?
Michael Sprung: Well, I mean that’s close to it, we just happen to be riding different horse at the moment.
Michael Hainsworth: Jino, thanks for holding in North York. Welcome to the program! Hello!
Jino: Hello! Thank you for taking my call. My question is on H&R Real Estate. Despite all the REITs receiving everyday, it keeps on going down. Is this a good entry point? Thank you!
Michael Hainsworth: Thank you!
Michael Sprung: Well, of course in all of the REITs, they generally have done pretty well if you look over the last couple of years as people were sort of searching and searching for yield. And now that we have seen interest rates take a little bit different direction, we are seeing some pressure on the REITs. I think that that pressure could continue for a while.
To some extent I think perhaps the REITs as a group were taken to a position where on a valuation basis, given the interest rate environment we were in, was perhaps not so sustainable. So what could we see going forward, if interest rates are going up, then cap rates could go up, and if cap rates go up, which is the price basis on which REITs are valued in terms of the yield that they earn on their properties, then those prices could be driven down to some extent.
So I would step back and I think I would wait a little bit from here.
Michael Hainsworth: All right! Jino, thank you for that from North York. Comox, BC.
Ron, good morning! Welcome to Market Call!
Ron: Good morning!
Michael Hainsworth: Hello! Good morning! What’s your question?
Ron: Well, my question is whether the Royal Bank is going to do well over the next year?
Michael Hainsworth: Where is the Royal Bank going over the next year?
Michael Sprung: Well, I think that all of our banks are reasonably valued at this point in time, although we saw a couple of them hitting highs in the last week. A few have been lagging that run up recently and the Royal is not one of them. So on a relative valuation basis I think I would be looking at one or two of the other banks, so we might get there later in the show.
However, the Royal Bank today, you are getting yield that’s approaching 4%, not quite 4%, and on a multiple basis I think they have recaptured some of that discount that they were suffering from a few years ago.
Now, we do have exposure to the Royal Bank. We are holding onto it, but I don’t think that I would be adding to our position today, at today’s price.
Michael Hainsworth: So Ron, stay with us, because at the end of the program we do have a bank opportunity for you as a top pick.
We are taking a quick break. Michael Sprung is here, President of Sprung Investment Management. We are talking Canadian equities at 1-855-326-6226.
View the rest of Michael’s interview here>>