There were a couple of months early in 2015 once the U.S. housing industry didn’t look so excellent. That dragged down a wide range of stocks, but the data has picked up since then, making housing an attractive opportunity for investors seeking value in the U.S. equity market.
One way to play this trend is thru Canadian lumber companies, and that’s what Aston Hill Asset Management portfolio manager John Kim is doing with Interfor Corp. The Vancouver-based clients are his largest weighting within the sector and it appears to be experiencing the fastest growth, primarily because of acquisitions.
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Those deals have pushed the proportion of Interfor’s revenues in the U.S. slightly above Half, whereas several of its peers still do the bulk of their business in Canada. The organization is targeting more M&A this season.
“I think lumber costs are down near their lows,” Kim said. “If U.S. housing starts remain in the 1.1-million range, and slowly trend a bit higher, lumber prices is, making producers a great investment for the next six to Twelve months.”
The portfolio manager from the Aston Hill Canadian Total Return Fund, which recently hit its one-year anniversary with a 12.1-per-cent return as of June 30, also now runs the Aston Hill Capital Growth Fund. Both funds use liquid alternative investing tools to manage downside risk, but the former is much more focused on Canadian equities.
Kim has reduced the cash position within the Total Return Fund to around 25 per cent today in the 45-to-50-per-cent range within the fall of 2014. He took advantage of the market pullback due to concerns about both Greece and China to add to several existing fund positions.
He also intends to do some selective additions for that Capital Growth Fund, while using volatility typically caused by light trading volumes during the summer months.
I don’t think the hedge funds understand the fundamental distinction between the Canadian and U.S.
Another favourite name that\’s a more direct experience the U.S. housing industry is Masco Corp. (MAS/NYSE). It manufactures and distributes do it yourself and building products such as cabinets, plumbing fittings and entertainment centres. Sales in those categories have a tendency to rise as home sales improve.
But Kim’s optimism about housing isn’t limited to the U.S., because he believes concerns about the Canadian market are overdone.
The portfolio manager thinks U.S. hedge funds that come into Canada to short everything related to oil prices and the housing market simply because they see a bubble just don’t have it.
The shorts have caused shares of companies such as mortgage insurer Genworth MI Canada Inc. (MIC/TSX) and Canadian Western Bank (CWB/TSX) – both fund holdings – to become hit particularly hard.
“I don’t think the hedge funds comprehend the fundamental distinction between the Canadian and U.S. market, even though you think they\’d have after the 2008-2009 crisis, in which the U.S. housing industry blew up but Canada’s didn’t,” Kim said. “We want to pay off our mortgages whenever possible, and because there is recourse back to us, Canadians just don’t leave behind their mortgages, even if they are underwater.”
He noted that the stock charts of both Genworth and Canadian Western Bank look a lot like oil and gas stocks, while they obviously have much better fundamentals because of their diverse business lines.