BNN - Thursday, May 23, 2024 - 06:00 p.m. (ET) - Segment #2

APR for up to 24 months. Visit INFINITI.ca. ( ) We know you care. But if this is all too real for you and your loved ones. Make the call. Because we care too. Home Instead. To us, it's personal. Find a great deal foryour ideal hotel.Open trivago, type inwhere you want t select your check-in andcheck-out dates and search. Compare prices forthe same hotel and save up to $50 a night. Hotel? trivago. Closed captioning of this BNN Bloomberg program is brought to you by Avenue Living Asset Management. Investing in the Everyday. >> Eric Nuttall is taking your questions on energy stocks. What else? >> John Sylvan in Alberta-- or John in Alberta, go ahead, please. >> Caller: (On phone)Hi, Eric. How are you? >> Hi, John. I am well, thanks. >> Caller:You are the man in the oil patch. >> Thank you. >> Caller:Can you give me your view on Tourmaline Oil with LNG possibly coming on? Natural gas prices increasing. Can you give me a target price on that, please? Thank you. >> You bet. Tourmaline I would regard as the highest-- one of the highest quality names that you can buy to get access to a bullish natural gas outlook for 2025. You are getting-- I feel like I've said this many, many times but you are getting all the attributes that you want. Rock star of a CEO, very good management team. Huge inside ownership. Decades and decades worth of drilling inventory. A very good gas marketing team. So they have done a great job of accessing hubs before competitors get premium pricing. You get exposure amongst them and other natural gas guys to a bullish outlook on natural gas as the storage glut gets erased due to what is now hot weather thank God plus producers curtailing volumes and the inevitable increase in LNG capacity. So for us Tourmaline it's a barbell approach. We have about a 5% weighting in Tourmaline. We have been adding to smaller cap natural gas names when liquidity allows because it is a challenge. We just bought more of one-- another one this morning. So for Tourmaline we have got it again this is $4 Nymex. Five times cash flow and about a 9.2% free cash flow yield. In terms of cash returns we have had about a 5.5 to 6%-- I am sorry. 7% yield next year, that's specials plus the base. US companies traded material premiums to Canadian names. You can look at a range in EQT they're at a 6s to 7s. So we think Tourmaline given the pedigree of management, inside ownership quality assets, all of these things, seven is pretty reasonable. That'd be a $93 target price which is 36% up side from now. So it's not the doubles. In terms of the fund manager you can't just have an entire fund with those types of names because the volatility will make most clients seasick at times. So you've got to add ballast. Tourmaline is ballast within a portfolio. >> Okay, thanks for the question. >> Daniel is in Markham, Ontario. >> Caller: (On phone)Hi, Andy. Hi, Eric. >> Hi, Daniel. >> Caller:Can I have your thoughts on energy allocation strategies? What's your decision-making process benchmarks and targets to deploy cash on the side to fully invest it as well as fully invested to tripping and selling. It's essentially the Eric Nuttall philosophy. Eric Nuttall, one of the best and favourite guest on Market Call. Come more often. >> Thank you very much. >> So personally and I am a little odd in this. I like to buy when others do not. I love panic. I love fear. When you want to be greedy when others are fearful and I find those best buys are when you are sick to your stomach. That's not the case today but a lot of before we talked about this earlier a lot of the florian oil oh, my god Ukraine is bombing Russia and what will happen with Israel and Gaza and Iran and all these different things. That is not a time to deploying capital because when there is huge risk premium in the oil price you've got to worry about waking up one day to a headline oil is down $5 names have fallen 10 to 15%. We look at where global oil inventories are today there is no risk premium in the oil price. We're bullish on oil. That makes me want to deploy capital. We have gone from 33% cash weight to about 10.5 right now. We're actively spending that money. So, the question is what do you want to buy. You can buy oil names. Right now if you look at the spread between large caps and small that valuation gap is the widest in history. Meaning the large guys are trading at such a massive premium, the small guys are such a discount, so why is that? There are two energy funds left in this country, another one of my competitors, um, he's winding down now is my understanding, they're a good team, they've done very well. So it's an inefficient market, there's not as much interest

in the small caps. So you'd think, well that makes you wanna buy large caps. We typically wanna be contrarian. We see opportunity in small, mid-cap stocks, so long as they-- You have asset quality, asset tenure, and a management team that you can trust where that free cash flow will allow for very meaningful share buybacks. And so when I think about, like, a Tamarack we talked about earlier, 20% free cash flow yield. Another one I'm gonna talk about later on, a 30% free cash flow yield. There's always a bit of hair to the story, and so your job as a fund manager, as an investor is to determine, is this a mispriced stock, or is this a value trap? A value trap is a cheap stock that stays cheap forever. A mispriced stock is, uh, an opportunity where there's a catalyst to drive that re-rating. And so my job is either to identify the catalyst or to create that catalyst to drive that re-rating, and my belief is it's those meaningful share buybacks. So, you know, actions speak louder than words, we're actively deploying cash that we raise pretty significantly about a month, month and a half ago. >> Just trying to think. So stocks are out of favour, I guess people are worried beauty is skin-deep but ugly goes all the way down! (Both chuckling) Uh, it's hard to find ones that are, yeah, unfairly discounted. Um, Anne is in Coquitlam, B.C. Go ahead Anne, please. >> Caller: Hello, good morning. Hi, just, um, first time caller! >> Oh wow, congratulations. >> Caller: Thank you. I've been listening to your program for quite a few years, at least four years. Uh, my question's about Gear Energy? I bought it as a penny stock, I bought it at 50 cents per share. Uh, it has done something, but not very good. So I'm just wondering, should I sell it and buy something like you, uh, Eric, recommended last time? It's called Precision Drilling. >> Or, or you can always buy an energy fund, I leave it up to you. So, uh, the concern with Gear is, once they-- So they right size the dividend, and I think they came out with the strategy about a year, year and a half ago where they were very aggressive on the dividend payout. And I think a lot of people confuse- How defendable should a dividend be? People think well, geez, you know, just increase the dividend and it'll increase investor interest, but there's two components: You have a base dividend, which should never be cut, ever. And so most quality companies will base that on a very, very low defendable oil price. So, like a Cenovus, I'm (Unclear), but they'll say, like, $45 oil, right? It's rock solid down to that level. Others wanted to try to attract investor interest and were too aggressive, and what they've been forced to do is cut that dividend. So Gear cut their dividend I believe by 50% several months ago. That alienates you from a large part of investors-- Like the thing with Suncor. So they cut their dividend during COVID, you know, negative oil prices. People still hate them for it, some people still hate them for it. So once you cut, it, it extremely alienates you from people wanting to deploy. Plus I mentioned earlier, this is not a market where there's a tremendous amount of small camp interest. So value trap, cheap stock. It's 2.2 times cash flow at $80 oil, it's 19% free cash flow yield. What's the catalyst to re-rate it? I can't come up with one, and so it's not a name that we own today. >> Not calling to you. Okay, we are gonna take a quick break, and then we'll have a look at Eric's Past Picks, that's coming up. (Upbeat instumental music)Canadians are facing a newnormal with interest rat and investment options. The Capital Direct OneIncome Trust is in a growing asset class thatprovides stability and is income-generating forportfolios. Here from Capital Direct areEire Gorman and Aaron Narayan, great to see you again. Thank you for havingus back, Mark. Eire,how are interest rates impacting the Capital DirectOne Income Trust? It's really important tounderstand the timeline of the loans that make upthe income trust. These are fixed-term vehiclesthat don't have the volatilityof a variable product. That means we're less-vulnerable to interest rate changes for18-24 months. Aaron, what arethe pros and cons for the trust if interestrates go down? First off, we love stability. Looking forward, we believe interest rates willact in our favour. If rates go down then (Unclear)or now Cora drops which means the cost of capitalis actually cheaper. And what if interest ratesstay around these levels? Aaron: If interest ratescontinue to stay the same we continue to kick out similarreturns as we have been for our investors which makethem extremely happy. So the trust holdsresidential mortgages. Based on what you're seeinghow would you say Canadian homeowners are coping in thisnew interest rate environment? This is a good news story. Canadians arefinding ways to cope. Our mortgage investments andflexible lines of credit have allowed homeowners toconsolidate at a lower rate and continue todo the things they love while owning their own homes. As we said here, homeownershipis so important to Canadians and we've seen the choices thatthey have made to remain in this privileged category. And it's also important to notethat throughout this new normal we've kept our loaned valueat a very comfortable 52%.

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