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Tetrem Capital Management’s Top Stock Picks

TD logoTetrem Capital Management was founded in 2004 and focuses on identifying undervalued companies, assuming that mean reversion will bring temporarily overpriced or underpriced stocks back to fair value. Its manager, Daniel Bubis, previously served as Chief Investment Officer at Assante Asset Management; assets under management at Assante grew by a factor of 70 during his time there. Tetrem has over $6 billion in Canadian dollars under management. See our full record of Tetrem’s 13F portfolio for the second quarter or read on to see the fund’s top picks.

Tetrem’s two favorite stocks at the end of the second quarter were Canadian banks Toronto-Dominion Bank (NYSE:TD) and Royal Bank of Canada (NYSE:RY) as the fund owned 3.8 million and 3.7 million shares, respectively. The Canadian economy is doing well, and investors continue to be interested in the country’s prospects on the basis of its natural resource endowments. One of the ways to play the general Canadian economy is by investing in financials focused on the country (though investors can also buy stock directly in many natural resources-focused companies). TD Bank also has substantial U.S. retail banking operations, while RBC is also known for its wealth management and investment banking businesses. The two banks are similar in size, at about $80 billion in market capitalization; they also trade at considerable premiums to the book value of their equity, with TD Bank’s P/B ratio being 1.7 and RBC’s being 2.1. Each company also turned in double-digit earnings growth rates in its most recent quarter compared to the same period in the previous year, with RBC’s being a particularly high 75%. Their dividend yields are close to 4% (though U.S. investors should do the math on how that dividend will be taxed) and their forward P/E multiples are in the 10-11 range.

Suncor Energy Inc. (NYSE:SU) was another of the fund’s top picks as it reported a position of . Suncor is a fellow Canadian company, with its most notable activities being exploration and production in Canada’s oil sands. It also drills for oil and natural gas in other geographies as well as including a refining and marketing segment. Suncor’s stock performance over the last year has been even with the S&P 500, pulling it to a market capitalization of about $50 billion. However, this figure is only 11 times the company’s trailing earnings and 10 times forward estimates of its earnings, with the stock paying a modest 1.6% dividend yield to boot. Tiger Cub Rob Citrone’s Discovery Capital Management was another hedge fund with a large position in the stock.

Tetrem owned 3.6 million shares of Potash Corp./Saskatchewan (NYSE:POT), a $37 billion market cap provider of fertilizer. The company has struggled recently but we think that the next few years should go well for it due to higher demand for agriculture, and in turn for fertilizer. Its stock is also priced reasonably, with trailing and forward earnings multiples of 15 and 12 respectively. Potash Corp has quite a bit of popularity with other hedge funds; Adage Capital Management increased its stake during the second quarter.

Rounding out the fund’s top picks was its 3.1 million shares of Barrick Gold Corporation (NYSE:ABX). Barrick owns 26 gold and copper mines across the globe. Its prospects depend on the price of gold, which we aren’t going to speculate on at this time, but we can see how the company is currently doing with prices where they are. The stock’s fall of 11% over the last year has corresponded with a 35% drop in earnings in the second quarter compared to the same period in 2011, and it trades at 10 times trailing earnings.

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