DOW JONES NEWSWIRE By Ben Dummett :: November 17th, 2011
TORONTO (Dow Jones)–Encana Corp. (ECA) is out of favor with many investors because of weak gas prices but, as contrarian investors, Brian Durno and Scott Jarvis own the big natural gas producer, betting it’s only a matter of time before the stock rebounds.
Excess supplies have weighed on natural gas prices, in turn undermining Encana’s stock price. But Durno and Jarvis, co-managers of the C$20 million Investment Partners Fund, are undeterred, noting the stock is inexpensive, trading around book value, and the company benefits from a healthy balance sheet.
At the same time, the natural gas supply-demand imbalance is unlikely to last. “Oversupply situations have a tendency to work themselves out in a depletable resource like natural gas,” Durno said.
The managers use a combination of quantitative, price technicals and fundamental analysis to develop downside and upside target prices for a company’s stock, aiming to buy a stock near the bottom of that range and selling it when it approaches the top. The managers acknowledge the difficulty of identifying the bottom of the stock’s price, so they typically start off with a relatively small position in a stock and add to the holding if the price falls, averaging down their overall acquisition cost in the process.
In addition to Encana, the fund’s top five holdings include speciality information publisher Thomson Reuters Corp. (TRI), Canadian financial institutions Royal Bank of Canada (RY) and Sun Life Financial Inc. (SLF), and steel producer Nucor Corp. (NUE).
The managers describe themselves as active traders, taking advantage of price volatility, but their focus is on blue-chip names that will be around for a long time. “We don’t speculate,” Jarvis said. The fund was launched Oct. 1, 2009. For the two-year period ended Oct. 31, the fund was up 10.7%, sharply outperforming the 3.4% gain in the MSCI World Canadian dollar index, according to Globe Investor, a fund-performance tracking service. For the one-year period, the fund was up 0.06%, again outperforming a decline of 0.24% in the benchmark.
September was a particularly tough month for the fund. It suffered because of several consecutive down days in the overall market. And during periods of strength, the gains were not strong enough for any of the fund’s holdings to approach the top of the managers’ target price ranges to have spurred selling activity.
The fund, however, rebounded in October, gaining 7.6%, and a contributing factor was the managers’ holding in fertilizer producer Mosaic (MOS). They bought the holding in early October, timing the acquisition when market sentiment was particularly weak, and then sold it the next day for a gain of more than 7% as the stock benefited from an overall market rebound. The week before the fund managers bought the stock, several agriculture stocks fell significantly in a knee-jerk reaction to the release of higher-than-expected corn inventory data.
For Durno and Jarvis, the sell-off generated a “good entry point” though they didn’t know they would be selling the stock the next day. “We were quite happy to hold Mosaic for one month, two months, whatever,” but if the opportunity arises “we are more than willing to be opportunistic and take profits right away,” Jarvis said.
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