Value manager Kim Shannon is the Founder, Co-chief Investment Officer and Portfolio manager, Sionna Investment Managers.Hallie Arden/The Globe and Mail
Value manager Kim Shannon is seeing light at the end of the tunnel. Growth stocks, particularly tech plays, seemed headed to the moon for more than a decade, but many have come crashing back to Earth. Now, her bargain stocks are getting more love amid sharp swings spurred by inflation and recession fears. Shannon oversees a team that runs about $1.7 billion in Canadian equity assets, including the Sionna Canadian Equity Fund, which trounced the S&P/TSX Composite Total Return Index over the past year. We asked the 64-year-old portfolio manager why she’s cautiously upbeat on energy stocks and finds Canadian Tire attractive.
Value stocks have been wallflowers for a dozen years. How did you manage through this drought?
It’s been frustrating—absolutely. Our firm’s talent is in value investing, and we never changed our stripes. I also feel that you need to play value differently in Canada or in deeply cyclical markets than in a broader market like the United States. We sometimes own stocks that wouldn’t exhibit deep value but would be the cheapest name in a sector. It was the lowest interest rates in financial-market history going back 800 years that made growth stocks more attractive and pulled in speculators. But we knew value would come back. U.S. growth stocks, for instance, handily outperformed value in the 1930s, but then value outpaced growth from 1941 to 1951 by an annualized 13%.
What is your outlook for the Canadian market?
This is an opportune time. It is extraordinarily cheap with a better dividend yield relative to the U.S. market and the MSCI World Index. Historically, Canada also tends to outperform the benchmark when inflation is north of 4%, which it is now. It has bigger weights in energy and materials than many markets. In an inflationary environment, commodity prices tend to rise with the cost of living.
High-flying energy stocks were hurt this summer by falling oil prices and recession worries. How do you see this sector?
We are cautiously bullish on energy stocks. In a sector considered risky, we will temper our bets. But energy companies are incredibly well capitalized because their cash flows lately have been quite strong. They are paying down debt and not spending on expensive drilling projects. And oil demand continues to grow while supply has been shrinking. Suncor, one of our bigger holdings, is more of a turnaround situation. It has been under pressure by an activist investor to improve its game and its safety record. We also like Arc Resources, a diversified energy company and Canada’s largest condensate producer. We own TC Energy and Pembina Pipeline, too. Pipelines are contractual businesses, have good yields and are more steady-Eddie players.
Many retailers are struggling, but your fund owns Canadian Tire, which sells everything from auto parts to housewares, and owns brands like Sport Chek and Mark’s. What’s the attraction?
Canadian Tire shares ran up during the COVID-19 pandemic because it saw increased revenues, but the stock has weakened because the market believes it will be more challenged to sustain sales. In the late spring, we acquired this stock, which is cheap compared to where it has traded historically. We think the management team is quite strong and responsive to the current environment. Because the retailer sources lots of goods overseas and foresaw potential supply-chain issues, it chartered its own cargo ships to ensure delivery of goods. Canadian Tire also has a strong loyalty rewards program, and its locations are convenient to most Canadians. It’s also rare to find a store where both men and women are willing to shop.
Why do you have a small position in gold royalty and streaming giant Franco-Nevada? Is this a value play?
Gold mining is a tough sector to invest in because it tends to trade at rich multiples. But it has been a significant weighting in the Canadian benchmark at times, so I can’t ignore it. We picked up Franco-Nevada a couple of years ago because of concerns about quantitative easing impacting inflation, and it was a less risky way to play the gold commodity. Our team was concerned about rising mining costs, but a royalty play is mostly collecting on the profits of the business.
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