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Mark Bunting is a host at Bloomberg TV Canada, and the publisher of The Capital Ideas Digest, a weekly compilation of investment ideas based on a variety of research reports. The Globe and Mail provides marketing services and receives compensation from its parent company, Capital Ideas Research. Try it now to enter the new $25,000 winner-take-all stock picking contest.
You've likely come across the term "animal spirits" more than once since the U.S. election to describe recent investor behaviour.
It's modern usage is commonly attributed to economist John Maynard Keynes who, in his 1936 book The General Theory of Employment, Interest and Money, described animal spirits as "a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
Daniel Lloyd is keenly aware that these animal spirits currently appear to be at work in equity markets more than usual. He's the founder and portfolio manager of Sui Generis Investment Partners. I had the chance to interview him in late January at Bloomberg TV Canada, where he told us investors were exhibiting "extreme greed."
Stocks have run even higher since then, but Mr. Lloyd has not changed his mind that many investors are relying, as Keynes put it, on their instincts, proclivities and emotions to make decisions, rather than fundamental analysis.
I interviewed Mr. Lloyd again recently, where he outlined his concerns, explained why short opportunities abound, his reasoning for legging into oil and gas stocks, how this market is similar to 2007, and, naturally, we also asked Mr. Lloyd for some investment ideas.
Mark Bunting (MB): You say you're market neutral. If we get a pullback slash correction, be it 3-5 per cent or 15-20, do you think you're well-positioned?
Daniel Lloyd (DL): Some of our positioning on the short side should give us torque to the downside, whereas on the long side we might have some pretty decent production. For instance, we have a 5-per-cent position across two gold miners, where those are the sort of names I think would perform in a weak market.
MB: Can you give us some names?
DL: We've owned Franco-Nevada (FNV-T) since we launched the fund. It's been great. We still own it, and we own Alamos Gold (AGI-T) as well, which has been very good to us.
MB: You say opportunities abound. Are they mostly short opportunities?
DL: Our instinct is to want to short a lot of names right now, which probably shouldn't be done just yet. We don't short momentum. There's a lot of opportunity out there, a lot of names that we can identify as pretty interesting shorts, but they're not necessarily names we're going to act on just yet because there's not necessarily any indication that this market can't keep going higher for the time being.
MB: Which are the most egregiously overbought, overhyped, overvalued sectors?
DL: I honestly believe the industrials, which have been given what you'd call the Trump bump, have really moved to the extent where I think they're incredibly interesting shorts. The most recent (short) trade we actually put on was we just really started easing into Caterpillar (CAT-N). I think it's an interesting short for a lot of reasons, but the promise of a trillion dollar infrastructure spend in the U.S. has taken the entire infrastructure space and the second and third derivatives of that infrastructure spend have been incredibly strong like engineering names. So I think the industrials, and anything related to infrastructure, are probably very inflated.
Mr. Lloyd thinks the market is missing the potential for oil demand. He's recently been buying some beaten down oil and gas names.
DL: Our favourite exploration and production name listed in Canada is Parex Resources (PXT-T). I think it's one of the best oil companies, and certainly one of the most well-run companies I've come across in a long, long time. Parex produces, call it, 35,000 barrels a day. They're focused entirely on Columbia. The company has net cash on the balance sheet, produces free cash flow, is growing production something north of 20 per cent this year. There's legitimately nothing to not like about it.
Mr. Lloyd provided is with another energy idea.
DL: We sort of had to plug our nose and step into it because energy names were so weak, but we bought U.S. Silica (SCLA-N), which is a large fracking sand provider in the U.S., which had come off something in the neighbourhood of 35 or 40 per cent in the course of a couple of weeks. For a reasonably large company, it's remarkably volatile, but the company itself has an interesting secret sauce as it relates to their product offering to unconventional oil and gas producers. U.S. Silica is actually a really, really interesting story. I suspect at some point it'll be taken over, but, buyer beware, it's a volatile name, for sure.