March - CI Investments

COMMENTARYWe own shares in CN Rail, CP Rail, and Norfolk Southernin our Canadian and U.S. portfolios. So far in 2010,carload volumes for the Big Six North American rails haverebounded more strongly than many had originally expected(See Chart 1), which explains the recent surge in the stocks.CAE is an aerospace name we recently added to ourCanadian portfolios. The company is a global leader in themanufacture of flight simulators for pilot training in boththe commercial aviation and defence sectors. We purchasedCAE at well below its historical mid-cycle valuation (SeeChart 2) when investors feared a prolonged downturn in theaerospace market. This fear seemed overblown, and we arenow seeing airlines place new orders with Boeing and Airbus– a big change from last year when the news was dominatedby order cancellations. In the long run, strong demand forCAE’s commercial flight simulators should be driven byseveral factors: replacement of aging fleets, new pilot hiresdue to accelerating retirements and increased global airtraffic. As earnings visibility improves, we believe the stockshould rally as investors become willing to value CAE onfuture results that are likely to be much improved.In our U.S. portfolios, we added Qualcomm in Februaryat a very attractive valuation after investors had punishedthe stock for temporarily weak near-term results, sendingit down approximately 28% from early January to lateFebruary. The company had missed earnings expectationsdue to lower-than-expected average selling prices, whichface long-term downward pressure. Investors appeared tobelieve the magnitude of average selling price declines goingforward would be more severe than originally thought. Wehad done our work on the stock and saw the controversy asoverblown, which created a buying opportunity. Aside fromthe compelling valuation, our confidence was supportedby the fact that Qualcomm owns key patents on wirelesstechnologies (3G, 4G) that are likely to experience longtermgrowth, more than offsetting the average selling pricedeclines. The company has a strong balance sheet, generatessignificant free cash flow and the stock trades well belowour estimate of the company’s intrinsic value. Out ofinterest, shortly after we took an initial position in the stock,the company announced a new $3 billion stock buybackCAE Inc. Valuation at an Attractive Discount to History18.0016.0014.0012.0010.008.006.004.002.000.00Apr 05Jul 05Oct 05Jan 06Apr 06Jul 06Oct 06Jan 07Apr 07Jul 07Oct 07Jan 08Apr 08Jul 08Oct 08Jan 09Apr 09Jul 09Oct 09Jan 10Source: Capital IQ, Tetrem Capital Managementand raised the dividend by 12%, two actions that indicatemanagement is intent on delivering value to shareholders.As was the case last quarter, our portfolios have a cyclicalbias – for now. We have been favouring names in sectorssuch as consumer discretionary (retail, auto parts, media),industrials (transports, aerospace), and energy (naturalgas, services). The overweight position in energy is alsosupported by our view that the long-term demand outlookis strong. Notwithstanding our pro-cyclical positioning, wesee opportunities emerging among companies, with stableearnings characteristics, that have lagged the overall market’sadvance. As the portfolio’s cyclical stocks approach fair value,we intend to harvest gains and will likely plough them backinto these undervalued defensive names.Manager: Daniel BubisEV/EBITDA (trailing 12 months)EV/EBITDA (average)Chart 2: CAE, a maker of flight simulators for commercial aviationand defence, is trading at a discount to its historical valuations. Thisreflects fears of a prolonged downturn in the aerospace industry butfails to reflect other long-term factors driving the company`s growth.Analysts: Ben Boult, Aaron Clark, Alec MacIsaac,Steve Maksymyk, Eileen MuellerPAGE 45 • SPRING 2010 PERSPECTIVE AS AT MARCH 31, 2010