Stockwatch – Michael Sprung on BNN

Stockwatch – Michael Sprung discusses his market outlook and stock picks with Mark Bunting on BNN

Mark Bunting:          Now having said all that and maybe time to take some profits, so that’s what our next guest has been doing in a couple of stocks that have had some big run ups. He feels we maybe headed for a correction in the U.S. and Canada. Let’s find out more. We have Michael Sprung here, president of Sprung Investment Management. He joined us here in the studio, good to see you as always Michael.

Michael Sprung:        Good to be here, thank you very much.

Mark Bunting:          We’ve had so many people calling for a correction of 10% or more for a long time, we haven’t seen it. Why are you convinced that we have to have to one?

Michael Sprung market outlook stock picks Mark Bunting BNN

Michael Sprung discusses his market outlook and stock picks with Mark Bunting on BNN

Michael Sprung:        Well, it’s not that we have to have one. We at least have to have a pause in here. Now, whether we see a 10% or 15% pull back, I don’t think it’s likely to be a very sudden jerk response but I think we could see a deterioration in the market over the next number of months simply because, as value investors, we don’t really look at the macroeconomics environment all that much but we have to be aware of it. It’s getting harder and harder for us to find stocks that we think we really want to purchase and there’s a lot of tell tale signs out there that the market is closer to a top or at least the upside potential from today’s level in the immediate future. Probably, it’s not as great as perhaps the downside could be in a lot of circumstances.

Over the last, while we’ve seen much more retail participation in the market. That’s usually a sign that people are weighing more into equities and certainly we’ve seen that much more in the last year or so.

Mark Bunting:          And taking more risk?

Michael Sprung:        Taking more risk too. We’ve seen rotation into smaller cap stocks more, not necessarily lower quality, but certainly higher out on the risk profiles. So, if you look at the averages in the U.S. you’ll see the much broader averages like the Russell which include a lot of the smaller stocks are running way, way ahead of the S&P and so on.

We’ve seen much more in the way of IPOs and mergers easily eaten up again largely in a retail environment. This is all out of time when I think a lot of it is being fed by the low interest rate environment that we’ve been in. Also people are using more margin which is always a dangerous sign.

In our view, interest rates really can’t go too much lower. If you look at all the moves that the Central Banks have made since 2008, they’ve largely been somewhat inflationary and yet we have not seen inflation come into the picture really yet, although we have seen an acceleration and rate of inflation in Canada more recently.

Mark Bunting:          Right. Just give us short answers here before we get to your picks, but which sectors are overvalued and where have you have taken profits?

Michael Sprung:        Well, we took some profits in Precision Drilling (TSE:PD) for instance. There are a number of stocks in the energy area that we’ve had really significant gains on where we’re looking at pairing back a little bit just to have some off the table. Materials just recently have had a bit of a lift that yes they had been depressed for some period of time. We don’t own any railroads anymore. Railroads have sort of run on the gambits that they can do so much better than GDP and yes they have picked up share and they’ve come from the lowest and there’s been improvements and operating efficiencies.

Overall companies, I think profits look high but that’s on the back of some significant cost cutting and perhaps lower wage rates than what existed prior.

Mark Bunting:          Right. Okay. So, your picks today, Agrium, Northwest Company, and New Flyer, let’s start with Agrium.

Michael Sprung:        Sure, Agrium Inc. (TSE:AGU), we think that you know you can buy that under a $100. It’s a well diversified agricultural play. The agricultural stocks have not kept pace with the base metals or even the precious metals lately, so they’ve sort of lagged. There’s been less demand for potash certainly, and potash prices have been depressed. We like Agrium because it’s a little bit more diversified and we think that you know if you can buy at anywhere between $96, $98, even you know up to $99, it has fairly good upside with more limited downside risk from here.

Mark Bunting:          Okay, and North West Company?

Michael Sprung:        North West Company Inc (TSE:NWC) is one that is certainly significantly pulled back from its highs. It was as high as $29 in the not too distant past. We’ve been able to buy it for under $25 and it’s a good solid yield play. We think that because their markets are somewhat protected, although they do operate in some areas that have been a little bit more depressed. The far north, there hasn’t been the actual mining activity that there was before. But as we see though the demand for those materials pick up and the acceleration of economic activity there, it will do better.

Mark Bunting:          Just a quick thought on New Flyer, it pays a handsome dividend.

Michael Sprung:        New Flyer Industries Inc (TSE:NFI) pays a handsome dividend. They have acquired a lot of the competition in North America. They still do have competition out there, but the one thing that is really evident is that a lot of municipalities and have to start replacing their fleets of buses and transportation. New Flyer, I think will certainly benefit from that.

Mark Bunting:          Nice looking chart, thanks Michael, good to see you.

Michael Sprung:        Thank you.

Mark Bunting:          Okay. Michael Sprung, president of Sprung Investment Management.

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Top Stock Picks

Top Stock Picks

Michael Sprung‘s top stock picks for July 2012

Precision Drilling (PD): Owned by clients, last purchase June 15 2012, $7.64
The pullback in oil prices has resulted in many companies in the oil patch to scale back capital expenditures. Investors are concerned that this trend may continue in firms that are dependent on greater cash flow. This fear has been particularly reflected in the oil service companies and PD is no exception. Selling below book value, PD offers tremendous value for patient investors.

Barrick Resources (ABX): Owned by clients, Last purchase June 15, 2012, $39.39
Disappointment at the board level with the share price performance has caused the board to replace the CEO with Jamie Sokalasky, a long term Barrick employee. In addition, the retreat in the price of gold has been reflected in the price of the producers’ stocks; Barrick being no exception. Barrick is the largest gold producer and is selling at reasonable multiples. We anticipate that the recent changes will result in a renewed focus on shareholder returns

Progressive Waste Solutions (BIN): Owned by clients, Last purchase July 15, 2012, $18.42
Recent weaknesses in the North East division have overshadowed more stable results in the Canadian operations. The stock price has over reacted to these problems and fears that competitive pricing pressures will continue to impact results for some time. BIN is well positioned to benefit from a pickup in economic activity. The company is well managed and will further expand operations strategically. At current levels, the stock price is compelling.

Why does our value investing approach work? The prices of well-established, high-quality stocks tend to rise over time as the companies create value for shareholders. Stocks touted by brokers and the media often rise to extreme highs in expectation that they will meet or exceed their short-term earnings forecasts. However, they can decline dramatically when they fail to meet those forecasts.