Canadian energy stocks have been driving markets this year, but Pierre Trottier is resisting the siren song of a sector that now occupies a very large segment of the index. "We have a very defensive bias," says Trottier, 34, manager of the $20.5-millionOptimum Actions and vice-president at Montreal-based Optimum Asset Management Inc. "When oil is going up a lot, and the rest of the market suffers, we don't participate as much. We prefer to buy what makes sense."
A value investor, Trottier looks for stocks that have upside potential of 25% over the next 12 to 18 months, but also have low downside potential. While value and growth criteria are built into his methodology, the former tends to dominate. These include industry-relative returns on equity and industry-relative price-earnings ratios. Drawing on a universe of about 700 stocks, Trottier screens companies on a quantitative basis and narrows the list to about 70 names. Then he asks if some are undervalued for genuine reasons, such as poor management or falling market share.
"But if it's a matter where the value has not been recognized by the market, then it's a buy candidate for our portfolio," he says, adding that he seeks companies that are trading below the broader market's price-to-book-value ratio. As a result of this scrutiny, Trottier narrows his list to about 40 names that meet both quantitative and qualitative guidelines.
Reitmans (Canada) Ltd. ( RET.NV.A/TSX) is a representative holding. Trottier spotted the women's wear chain in mid-2002 when it was little followed. But under its CEO, Jeremy Reitman, the firm was in the process of expanding its operations.
"The market began to recognize the value in the company. There's been both an increase in earnings and the price-earnings ratio." Bought at about $5.50, the shares have climbed to $16.40.
Since Trottier limits holdings to about 7% he began taking profits as the stock kept climbing. Currently, it is a 3% position, in line with its original weighting.
Trottier tends to buy large-cap blue-chip names such as BCE Inc. ( BCE/TSX), Petro-Canada ( PCA/TSX) and Toronto-Dominion Bank ( TD/TSX). "But we will own some smaller names, too, when they offer a good story and the potential to enter the index," he says, noting holdings such as broadcaster TVA Group Inc. ( TVA.NV.B/TSX). "You can get a multiple expansion if the story is good."
Mindful of balance sheet characteristics, Trottier also avoids companies that have little or no profits and debt-equity ratios that exceed 60%. "We like to end up with companies with stronger balance sheets. That is always helpful in a downturn," he says. Two years ago, for instance, he dropped Bombardier Inc. ( BBD.SV.B/TSX) when its fortunes declined.
A native of Quebec City, Trottier graduated from Laval University in 1994 with a bachelor's degree in actuarial science and a diploma in economics, which he completed concurrently. In 1995, he completed an MBA at Laval, with some courses taken at South Florida University.
Trottier landed his first job as an oil and gas analyst at SOQUIP, or Societé québécoise d'initiatives pétrolières, a government-owned energy-related agency. In 1996, he joined Montreal-based Valorem Investment Management where he covered the gold, base metals and consumers sectors. Later, he became assistant portfolio manager of a dividend fund.
The experience also led to his value bias. "It seemed more logical to me. We want to protect the downside and that's an approach that fits what we do."
In January 2000, Trottier moved to Optimum, where besides managing Optimum Actions he also runs the $21.7 millionBatirente Canadian Equity, a fund sold to members of the Comité Syndical National. Both had been run in a value style, but Trottier reduced the number of holdings by a half.
Turnover has been dropping steadily, too, from 144% in 2002 to 79% in 2003. Trottier intends to go lower still, with a target of 50%.
Based on their historical holdings over the past three years, the Optimum and Batirente funds are currently in the Canadian Equity (Pure) category. But a category change appears to lie ahead, since Trottier says his foreign holdings will exceed the 5% threshold for that category as he seeks further diversification outside Canada.
Lately, for instance, Trottier has bought into foreign health care and consumer discretionary stocks. His recent acquisitions include Pfizer Inc. ( PFE/NYSE) and Johnson & Johnson ( JNJ/NYSE).
"Our positioning is more defensive," he says, acknowledging that performance has been challenging in a market focused on energy. "We may own some oil stocks, but we always buy names where the downside is more limited and there is still potential to appreciate."
