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WestJet: time to take profits?

Also: Bill Bonner offers up three dark horse picks in the energy sector

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Apr 17, 2013

by Max Fawcett

Airline stocks have reached their cruising altitude. At least, that’s the word from RBC analyst Walter Spracklin, who thinks the valuations on companies like Air Canada (TSE:AC.B) and WestJet (TSE:WJA) have soared a bit too high. WestJet stock is up 80 per cent in the last year alone, and he thinks it might be time for investors to take some profits. “On the heels of this rally, we expect share prices to consolidate at current levels, as we see weakening data emerging from both a macro and sector specific standpoint,” he said in a note.

He thinks the sector might be building out too much new capacity right now, given the underlying macroeconomic weakness in both Canada and the U.S. With WestJet launching its new short-haul airline, WestJet Encore, Air Canada starting a new division of its own to service vacation travellers and Porter Airlines announcing that it intends to become the country’s third national airline, the record load factors that have been driving profits for airline companies could be in jeopardy.

Meanwhile, Bill Bonner, the president of Brickburn Asset Management, was on BNN’s Market Call yesterday to talk about energy stocks. His top picks were Twin Butte Energy (TSE: TBE), Manitok Energy (TSXV: MEI) and Surge Energy (TSE: SGY). He likes Twin Butte because of its yield and the margin of safety it has, noting that it has one of the lowest payout ratios in the sector. “More importantly,” he said, “I think Twin Butte is going to offer some growth in terms of its dividend through its acquisition strategy. I think the future’s quite bright, and I see the stock much higher as the dividend gets increased over time.”

Manitok Energy is a name that some investors may not be familiar with, but he thinks it’s poised to deliver “incredible” production growth. The management team came from Talisman, and they’re putting their background to work with their new company. “Their expertise is in the foothills region of Alberta, which is essentially a deeper basin, and they have proven that they know what they’re doing. They’re 11 for 11 in the significant wells in the Stolberg Cardium play – what else do we need as evidence?” He also likes the company for its valuation. “Looking forward into 2013 and beyond the stock, at today’s value, in our mind, we’re essentially paying for the reserves they’ve discovered on six of their sections in the Stolberg play,” he says. “That’s just the tip of the iceberg for them, plus they’re developing other regions.” He thinks the stock could hit $5 in the right environment.

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Finally, Bonner picked Surge Energy, a company that, as he put it, has been “clobbered” of late. He thinks that’s not entirely deserved, given the fact that it added 40 per cent to its proven reserves, but notes that major institutional selling combined with missed production targets may explain most of the stock’s decline. “I think the position that was held by one of the big funds was almost 20 per cent of the stock, and they’re now gone. It was under incredible selling pressure.”

He says the valuation is compelling – beyond compelling, really, given that it’s selling for two times cash flow. “I’ve only been doing this for 30 years, but I know that when I can buy a stock for two times cash flow, the odds are I’m going to make some money on it.”

 

 

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