Small cap fund manager Steven Palmer of AlphaNorth Asset Management spoke with Gravitas Financial’s Vikas Ranjan recently about October’s stock market sell off and why he believes the broader trend will continue. As well, he explains why he doesn’t have any sector biases and hints that he’s adding some resource names to his portfolio. He also mentions one Venture exchange listed stock that he bought recently that has soared more than three-fold during the past month.
Narrator: Small cap stock prices have been hit hard recently as global economic growth concerns have dragged down oil futures and a stronger U.S. dollar has taken the shine off of gold. So, what’s an investor to do? Ubika Research Senior Analyst, Vikas Ranjan, spoke with top Small Cap Fund Manager, Steven Palmer of AlphaNorth Asset Management in search of some answers.
Vikas: Welcome Steve. The market seems to be in free fall. Do you think this is the time to be hitting the panic button?
Steven: No I don’t. It’s usually a good time to be buying when there’s panic and we think there was a good opportunity last week with the market sell-off. Many investors have been waiting for a 10% correction for some time now and we finally got it in Canada, and it was 9.8% in the S&P.
Vikas: Do you think that this is just a correction or are we starting a new trend? Down trend rather.
Steven: No, I think this is a correction within a bull market. The global economy is expected to be stronger in 2015 than in 2014. The U.S. economy is still very strong and earnings have been very good, generally.
Vikas: What about the small caps? They did participate in going up slightly, but they have been hammered down strongly after this panic, this sell-off. Do you see small caps recovering as well?
Steven: I believe small caps will recover also. The TSX Venture Index is up nicely off the bottom. The small caps were down much more because of the heavy resource exposure and the strong U.S. dollar in September contributed to a weakness in resource prices, or commodity prices.
Vikas: What is your overall outlook for the markets going forward? If you have a crystal ball and you can see six months to one year down the road, where do you see markets going?
Steven: I don’t have any specific target prices for the markets, but I do believe that the recent trend that we’ve seen over the past three years will continue. The broader markets will continue to set new all-time highs and the small caps will start to outperform.
Vikas: So is it really investors have got panicky because the markets are going in one direction, up, for a long time, and then suddenly there’s a herd mentality that, let’s take some profit off? Or is it something more serious about the global economy? And consequences could be that markets could get hammered again.
Steven: Well, the large caps have had a significant move since 2009 without a major correction, so a lot of people were waiting for a significant correction. And some of the macro events like Ebola, and the Russia situation, and maybe a possible slowdown in Germany, these are factors that the press pointed to, to make people more nervous.
Vikas: Right. It’s more headline news which is sort of a negative combined with markets going up considerably in the last couple of years. People have kind of taken profits. That’s what you think is happening.
Steven: That’s what I think. Yeah. And in the recent downturn, people were waiting for capitulation.
Vikas: Right.
Steven: And I saw a lot of signs of that last week. The technical analysis work that we do showed that when the markets open, sell-off strongly but recover by the end of the week or by the end of the day.
Vikas: That’s a good sign.
Steven: That’s a good sign of capitulation.
Vikas: Are there specific sectors/areas which you like right now, which you would be looking to get into if the opportunity is presented?
Steven: In terms of sectors, we don’t really have sector biases right now. I’m pretty positive on all sectors. Over the last couple of years we’ve been focused more on the non-resource sectors. But with the recent sell-off in the resource sectors, the evaluations are much cheaper and we think there’s a lot of opportunities in those sectors, also.
Vikas: That’s a pretty contrarian view because right now people are just running away from resources. You have done well with technology, so is it time for you to take the opposite view, which you normally do all the time, and get into some resources selectively?
Steven: We’re starting to selectively add to some resource names. We like to run the portfolio with a balanced approach, like try to maintain roughly half non-resource and half resource.
Vikas: Right. What would be your advice at AlphaNorth to small cap investors at this stage?
Steven: I would recommend just don’t panic. Focus on company fundamentals. The press likes to sensationalize various issues. Like last week CNBC was talking about a company that reported strong earnings and then the newscaster said, “Well, what about Ebola?” So what about Ebola. It will be over within a few weeks likely.
Vikas: Right, okay, very good. Any specific names, company, which you like at this stage or that you find appealing?
Steven: There’s one which we investigated recently called Vogogo Inc. (TSXV: VGO) and it’s done very well, considering the market has been trending down strongly.
Vikas: What do they do?
Steven: They process Bitcoin transactions.
Vikas: Bitcoin transactions?
Steven: So they’re the intermediary between the banks and the Bitcoin exchanges.
Vikas: Interesting.
Steven: And taking care of that plus the compliances required for those transactions.
Vikas: Very good. Thank you Steve. Thank you for spending time with us.
Steven: Okay. Thank you.
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