In his monthly interview series with SmallCapPower.com, prominent hedge fund manager Steve Palmer discusses his outlook on the market, the sectors that he favours and companies he finds interesting.
SCP: How is the year 2011 going so far for in your opinion for the stock markets, especially for listed small cap companies?
Steve Palmer: It has been a tough year so far for most small cap funds as the TSX Venture Index has experienced negative returns year to date. This should not be surprising given strong returns experienced over the latter part of 2010.
SCP: The stock markets have gone up considerably during the first quarter of 2011 but have been showing signs of weakness lately. Do you think we are about to enter a soft patch for the year? If so then how do you think small cap companies will fare in coming months?
Steve Palmer: We have already gone through the “soft patch” as the market experienced a correction in March and has languished since. I believe markets are set to break out to the upside in the short term.
SCP: You were bullish at the beginning of the year and were anticipating a gain of 12%-15% for the markets. Do you still hold that view? What could potentially jeopardize that outcome?
Steve Palmer: I have not changed my outlook for 2011.
SCP: What is your outlook for the North American economy, especially the US economy? Do you think that the biggest economy on the planet has turned a corner for the good? If yes, how do you think it will impact the Canadian economy and global stock markets?
Steve Palmer: The North American economy continues to improve slowly. This is supportive for equity values and will contribute to stronger earnings growth. Earnings reports for the majority of companies have generally been quite strong over the last several quarters.
SCP: In the beginning of the year, you mentioned that you preferred energy stocks especially junior oil, uranium and rare earth. With the recent nuclear disaster in Japan, where do you see the demand for Uranium going in the future? Do you think that the recent sharp decline in some of the well known uranium stocks could is overdone and could present good buying opportunity in the long run?
Steve Palmer: The long term demand for uranium will not change due to this event. The decline in uranium stocks in March was a buying opportunity in our opinion. We added to a couple of our uranium positions in March at prices very close to the lows.
SCP: What are some of the risks that markets face during the 2nd half of the year? Are there specific risks related to small cap companies that investors should worry about?
Steve Palmer: The biggest risk for Canadian small caps continues to be a slowdown in Asian growth which will result in lower demand for resources. The Canadian small cap market is dominated by junior resource companies. This is one reason why we have been more focused on adding non-resource names to the portfolio in recent months.
SCP: Are there some areas that you prefer for investment? Are there some companies that you like currently or have done well in the past with?
Steve Palmer: Our flagship fund, the AlphaNorth Partners Fund, has done extremely well this year with Exploration Orbite (TSXV:ORT.A) and Intertainment Media (TSXV:INT) both of which have returned more than 10x over the past few months. We have participated in some non-resource names recently and continue to look out for these sectors to balance out the portfolio.
Steven Palmer’s Disclosure: I personally and/or my family and/or AlphaNorth Asset Management may own shares of the companies mentioned in this interview.