Although the Canadian equity market has begun to cool, after a lengthy torrid pace, Teresa Lee finds that stocks are still too expensive.
"We're always watching for names marching up our quantitative model. They start to show up as cheap because of an earnings disappointment, or a CEO leaving," says Lee, 32, lead manager of the $796.7-millionCI Canadian Small/Mid Cap and portfolio manager, equities at Toronto-based Sionna Investment Managers Inc. "Some names might surface, because they show value," adds Lee. "But the overall market is tough. There are not a lot of opportunities."
A bottom-up investor, Lee begins the stock-picking process by using a proprietary model to calculate a stock's intrinsic value. Also dubbed a mosaic, the model encompasses three factors: book value, historic return on equity and relative price-to-earnings ratio. This exercise generates a list of 150 stocks, but it's only a starting point.
"Quantitative models have flaws. You have to watch out for things that could trip you up," says Lee, noting that companies with a lot of debt often show up as having a lot of intrinsic value. "You might find something that [appears] cheap when it is not."
Lee continues with qualitative analysis and writes up reports on each company based on a detailed questionnaire and discussions with management. "We try to figure out whether we like the company or not. At the end of each report, the answer surfaces," says Lee. "The qualitative process may find that a stock is cheap for a reason."
Russel Metals Inc. ( RUS/TSX), a leading national distributor of steel products, is one recent example of Lee's methodology. "The company had made some acquisitions but was quite misunderstood by the market," she says.
Shares of Russel traded last fall at five times earnings and generated a 5.8% dividend when Lee paid about $15 for the stock. Today, they are $25.60 and the price-earnings multiple is 10. While the stock has lost much of the discount to its intrinsic value, Lee maintains there is still some upside left, since the market tends to overshoot.
A native of Kamloops, B.C., Lee attended the University of British Columbia where she graduated in 1995 with a bachelor of commerce degree and a major in finance. In between, she spent a summer in the investment department at Royal Insurance in Toronto.
"It was a fun business; you worked with smart people and got exposure to CEOs very early on," she says, recalling that was where she met her future boss, Sionna founder Kim Shannon.
On graduation, Lee went back to the insurance firm, which had merged with another to become Royal & SunAlliance Canada, and worked as an analyst. In late 1998, she became manager of the organization's $50-million Canadian small-cap fund.
Then in 2001, Lee joined the Vancouver-based Jim Pattison Group. While there, she was a senior securities analyst and monitored the firm's investment portfolio.
In 2003, Lee moved back to Toronto to join Sionna. Initially, she worked with Shannon on the $5-billionCI Canadian Investment
, and in September 2004 she began managing CI Canadian Small Cap.
A year later, Sionna acquired Clarica Small/Mid Cap and the two funds were merged. The resulting fund inherited the performance numbers of the Clarica product. Since September 2004, Lee has also co-managed the $324.3-millionSynergy Tactical Asset Allocation, making small-cap picks.
Lee's largest mandate, CI Canadian Small/Mid Cap, is currently in transition. "We spent the last six months consolidating the portfolio," she says, adding that she intends to reduce it to about 50 names from over 150. While holdings can go as high as 5%, the fund's current larger positions are only 2.5% to 3%.
Portfolio turnover will also be sharply reduced. The fund's historical turnover rate has ranged around 70% to 80%, and Lee intends to lower it to about 20% to 25%.
Going forward, Lee will stick with the rigorous process of buying and selling stocks regardless of market conditions. "If a stock doesn't meet our target within two years, we re-assess the situation to see where we may have been wrong in our analysis, or determine what has changed," says Lee. "We make a decision from there."
Lee adds that she will sell a stock if some unanticipated aspect of the company emerges that changes her original thesis. "But if the situation hasn't changed, and the reason for owning the stock is the same as when you bought it, then you shouldn't change your position."
, and in September 2004 she began managing CI Canadian Small Cap.
A year later, Sionna acquired Clarica Small/Mid Cap and the two funds were merged. The resulting fund inherited the performance numbers of the Clarica product. Since September 2004, Lee has also co-managed the $324.3-millionSynergy Tactical Asset Allocation, making small-cap picks.
Lee's largest mandate, CI Canadian Small/Mid Cap, is currently in transition. "We spent the last six months consolidating the portfolio," she says, adding that she intends to reduce it to about 50 names from over 150. While holdings can go as high as 5%, the fund's current larger positions are only 2.5% to 3%.
Portfolio turnover will also be sharply reduced. The fund's historical turnover rate has ranged around 70% to 80%, and Lee intends to lower it to about 20% to 25%.
Going forward, Lee will stick with the rigorous process of buying and selling stocks regardless of market conditions. "If a stock doesn't meet our target within two years, we re-assess the situation to see where we may have been wrong in our analysis, or determine what has changed," says Lee. "We make a decision from there."
Lee adds that she will sell a stock if some unanticipated aspect of the company emerges that changes her original thesis. "But if the situation hasn't changed, and the reason for owning the stock is the same as when you bought it, then you shouldn't change your position."
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