There were a few months early in 2015 when the U.S. housing market didn’t look so great. 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 through Canadian lumber companies, and that’s what Aston Hill Asset Management portfolio manager John Kim is doing with Interfor Corp. The Vancouver-based company is his largest weighting in the sector and it appears to be experiencing the fastest growth, primarily due to acquisitions.
Those deals have pushed the percentage of Interfor’s revenues from the U.S. slightly above 50 per cent, whereas several of its peers still do the bulk of their business in Canada. The company is targeting more M&A this year.
“I think lumber prices are down near their lows,” Kim said. “If U.S. housing starts stay in the 1.1-million range, and slowly trend a bit higher, lumber prices will come back, making producers a great investment for the next six to 12 months.”
The portfolio manager of 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 more focused on Canadian equities.
Kim has reduced the cash position in the Total Return Fund to about 25 per cent today from the 45-to-50-per-cent range in the fall of 2014. He took advantage of the market pullback because of concerns about both Greece and China to add to several existing fund positions.
He also plans to do some selective additions for the Capital Growth Fund, using the volatility typically caused by light trading volumes during the summer months.
I don’t think the hedge funds understand the fundamental difference between the Canadian and U.S.
Another favourite name that is a more direct play on the U.S. housing market is Masco Corp. (MAS/NYSE). It manufactures and distributes home improvement and building products such as cabinets, plumbing fittings and entertainment centres. Sales in those categories tend to rise as home sales improve.
But Kim’s optimism about housing isn’t limited to the U.S., as 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 because they see a bubble just don’t get 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 be hit particularly hard.
“I don’t think the hedge funds understand the fundamental difference between the Canadian and U.S. market, although you think they would have after the 2008-2009 crisis, where the U.S. housing market blew up but Canada’s didn’t,” Kim said. “We want to pay off our mortgages as much as possible, and because there is recourse back to us, Canadians just don’t walk away from 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, even though they obviously have way better fundamentals owing to their diverse business lines.
Genworth, the Total Return Fund’s largest position in the financial services sector, has been aggressive in terms of taking provisions to prepare for possible losses next year. Kim noted that its reserves will be even more hefty than during the 2008-2009 downturn, and he can’t imagine it being nearly as bad this time around for the financial markets.
On the U.S. side, the prospect of rising interest rates a decade ago would have been a much bigger concern for that country’s real estate market than it is today.
Back then, most mortgages had adjustable rates or shorter, open-ended terms. But with rates being very low for such a long period, it’s motivated homeowners to extend the terms of their mortgages.
Kim points out that mortgages can be locked in for 30 years in the U.S., unlike in Canada. “Short-term rate fluctuations don’t have much of an impact from that perspective,” he said.