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Outlook For The Canadian Economy, Equities, Crude Oil & Natural Gas with Robert A. Floyd, CFA

by Arjun Rudra on April 26, 2010

Always curious as to the thoughts and opinions of portfolio managers, we are thrilled to present below our interview with a 29 year veteran of the capital markets, Robert A. Floyd.

Robert is the lead manager at R.A. Floyd Capital Management. His investment experience spans 29 years and has managed assets up to $1.7 billion of which $1.2 were Canadian Equities.

Robert’s specializes in small to large cap Canadian Equities and his portfolio management style utilizes a GARP or “growth at a reasonable price” approach.

Robert has extensive experience in managing Private Client, Pooled Funds, Pension Funds, Segregated Funds, Mutual Funds, and Corporate Funds, including client servicing and board presentations. For additional information about Robert or to arrange a meeting with him, feel free to contact him here.

Robert has been appearing on BNN - Business News Network (fomerly ROBTv) since the summer of 2000. He has been on a variety of BNN (formerly ROBTv) Programs over the years. He is a regularly featured guest of Market Call & Market Call Tonight — both live call in shows.

Q: Given that the Canadian Dollar at now at parity with the US Dollar, global investors appear to be voicing their optimism for the Canadian economy – Mr. Floyd, what are your thoughts and outlook on the Canadian economy currently and going forward (also how does this outlook translate to the equity markets)? Are there any ‘black swans’ that people might be missing or failing to discount that might tarnish this rosy picture?

A: With the dominance of resources in Canada, investors have benefited from the general uptick in pricing across a broad assortment of commodities. Canadian investors have also enjoyed a stable financial system as world economies have suffered through one of the worst recessions since the great depression. Pacific Rim buying of our resources has been the main driver on the demand side of the equation as Canadian companies rush to fill this growing demand from afar. All of the infrastructure required to ship these resources have also been beneficiaries from this fact. Infrastructure spending from around the globe has helped many of our industrialized companies and the Canadian stock market reflects this fact. While interest rates are firmly on the rise, this fact should not negatively affect the course of the market in the short term. If there is any significant drop in buying of our commodities, we will feel the impact immediately.

Q: Mr. Floyd, are we currently in an inflationary, reflationary or deflationary environment, why or why not?

A: We are currently in the process of reflating as the North American economy comes back to life with the aid of low interest rates, stimulus spending and cost-cutting. Economies around the globe are showing strong economic growth as we enter the second quarter of 2010. Now countries are gradually starting to raise interest rates to start to slow down the exceptional growth that is starting to be recognized. The Euro zone is the one notable laggard.

Q: Given the duration of this largely uncorrected rally since March 2009 in the equity markets, are there any sectors Mr. Floyd that are still relatively overlooked and undervalued? Conversely, are there any sectors that are overvalued?

A: I would argue that the market has been self-correcting along the way and while we have not experienced a major pullback at this juncture, we have seen a number of minor pullbacks that have taken off the over-bought nature of the market. The industrials appear poised for further growth on the upside as demand comes back to life in many manufacturing concerns. At this stage of the cycle, I think that it is more important to look at the individual names for over-valuation than by identifying individual sectors that appear over-valued.

Q: Mr. Floyd, with WTI Crude trading at approximately $85/barrel and Natural Gas trading at approximately $4/mmbtu, the oft mentioned oil to gas ratio seems to be gravely displaced from the average ratio of 6 to 1. Given that the ratio is approximately 21, what do you think this means for the price of gas/crude? Do you see this ratio narrowing or widening in the near future? How much weight do you assign to this oil to gas price relationship, if any, and how do you assess the value in the price of oil or gas?

A: With the advent of new drilling technology, gas inventories have remained higher than typical oil inventories. The relationship in pricing between the two commodities will vary because oil is an international commodity while natural gas is more of a North American commodity. Referencing historical ratios of prices may no longer apply as we enter a new cycle of growth that is more dependent on the Pacific Rim. The demand for oil is reaching a new level. Looking at North American inventories of these commodities on a weekly basis may only be a part of the equation given the demand for oil coming from China and India. Our old metrics may no longer apply.

Q: Lastly, what is your highest conviction investment idea right now? Can you please elaborate on the valuation metrics, the caliber and performance of management and the relative position/standing of this investment idea with regards to its peers?

A: I like to look at ideas that have not been fully recognized by the marketplace. I like to buy stocks cheap and ride them up for the cycle as long as it makes sense to do so.

Bombardier 3 Year Price Chart

Bombardier [BBD.B‎: TSX] has shown tremendous fortitude as it proceeded through a punishing recession. With the diversity of operations between planes and trains, the company has maintained a strong backlog in both operations during this timeframe. Bombardier has good cash-flow and sports a small dividend. The company has maintained a solid cash position and as the economy continues to improve, the more profitable part of the company, the plane operation, will come back to life. In the meantime, the train operations are continuing to amass considerable large contracts through infrastructure spending. The company has received 90 firm orders for its new C series jet and it will take the company to a new level of growth. Embraer, its major competitor, is still contemplating building a plane for the 100 to 150 seat marketplace. Bombardier has the edge and a major window of opportunity. This could be a fruitful opportunity.

Thank You, Mr. Mr. Floyd!

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