In his monthly interview series with SmallCapPower.com, prominent hedge fund manager
Mr. Palmer discusses his outlook on the market, sectors that he favours and companies he finds interesting.
SCP: In your last interview, you mentioned that December is generally a good month for small cap stocks and so far small cap stocks, especially the junior resource stocks have performed well. You also thought that junior resource stocks will likely do well in the coming months. As the year comes to an end, how do you feel about the outlook for the markets in year 2011?
Steven Palmer: I am bullish for equities for the first part of 2011 anyway. We will have to see what develops and how the market reacts before making any conclusions beyond that.
SCP: Could you tell our readers a little bit about your Alphanorth fund performance this year and its strategy for the next year.
Steven Palmer: With only a few days left in the year it looks like we will have another great year. Our strategy in 2010 worked quite well as we were generally bullish for 2010 and took advantage of opportunities with a focus on the long side. We took a more negative view during the summer and were able to add some positive returns from short sales during that period. We have been aggressively bullish since August and we expect positive returns for equity markets for the first part of 2011 at a minimum.
SCP: Do you think that economic growth in the U.S.A will pick up steam in 2011? How will Canada fare in the coming year?
Steven Palmer: These economies should continue to improve slowly.
SCP: What in your opinion are the biggest risks facing the markets as we enter 2011? What would you suggest investors do to manage those risks?
Steven Palmer: The biggest risk factor for Canadian equities (given that the Canadian market is heavily skewed toward the resource sector) is a potential slowdown in Chinese growth. When this occurs it will have a big negative impact on Canadian equities. To mitigate this risk, we manage the AlphaNorth Partners Fund with a diversified approach. Typically only half of the fund is invested in resource equities unlike many Canadian equity funds which have a resource focus. We are also monitoring the Chinese situation closely and will adjust our exposures accordingly if warranted.
SCP: You mentioned in your last interview that Alphanorth Asset Management has a diversified portfolio, which is a good hedge if something goes wrong with the resource sector. What are your preferred sectors for investment other than resource and what is your outlook for those in the coming year?
Steven Palmer: There are not many small cap Canadian companies in the financial or consumer sectors. Most of our investments outside of the resource sectors are in special situations and technology. We evaluate these companies on a bottom up basis. Many of these investments have significant upside potential which is not conditional on economic growth unlike the bulk of resource companies.
SCP: Do you think that the growth in China, the biggest consumer of resource, is poised to slow down and will impact the commodity sector negatively in the coming year? If so, what is your investment strategy to safeguard against such risk?
Steven Palmer: Chinese growth will definitely slow, it is just a matter of when. I will not venture to predict when at this point but this is why we believe that it is prudent for our portfolio to be diversified across other sectors which will not be as negatively impacted by slower Chinese growth.
SCP: You have been quite positive on energy and rare earth metal sectors. Do you still like those sectors? If yes, what are some companies that you like in these sectors and why?
Steven Palmer: We have trimmed some of our rare earth exposure into the recent strength. Energy is probably our preferred area in the resource space currently. We have several attractive opportunities in this area. I have mentioned Primary Petroleum (TSXV: PIE) in a previous interview. We still like the prospects for that company. A more recent addition to the portfolio has been Canadian Overseas Petroleum Ltd (TSXV:XOP) which recently completed a substantial financing at $0.50 to fund drilling of several North Sea prospects. I believe they have favourable odds for success which are spread over multiple drill targets. They plan to begin drilling in March.
SCP: You have not been a big proponent of investing in gold and junior gold exploration companies. Bullion has continued to strengthen in past few months. Do you think gold is poised for a correction and other precious metals like silver are better investment bets?
Steven Palmer: I believe that gold and silver will both correct in the near term. Gold has actually not appreciated over the past two months while copper and oil have risen approximately 8%. It will not be pleasant time for the gold bulls when the retail money heads for the exit. It is only a matter of time for when that will occur.
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.