January 27, 2014

Manager’s Quarterly Commentary – David Barr – Q4 2013 – Pender Small Cap Opportunities Fund

Written by David Barr

Our Fund ended the year with an excellent quarter. It was up 13%1 compared to 7.3% for the benchmark2. Again, the performance of the Fund was largely driven by the performance of key holdings including QHR (TSXV: QHR), Sierra Wireless (TSX: SW) and TIO Networks (TSXV: TNC), with the assistance of one announced takeover in the quarter, Commercial Solutions Inc. (TSX: CSA). Since inception3 the Fund has had an annualized return of 21%1, compared to 9.2% for the benchmark. 

1 Refers to Class A units in the Fund.
2 S&P/TSX Capped Composite Total Return Index.
3 Inception is June 2009.

Are we getting worried?

On the back of two very strong year’s performance in the Fund, this is the logical question we are getting asked by people about the current state of the market.  While markets as a whole are more expensive than they were a year ago, there are typically opportunities for enterprising value investors.  As we run a concentrated portfolio, we really only need to hold 20 great companies at a good price to drive the performance of the Fund.

One interesting situation we’ve recently added to the Fund is Northstar Healthcare Inc. (TSX: NHC).  Northstar is a Canadian public company that runs ambulatory surgical centers (“ASC’s”) in the southern United States. With a market cap of less than $100 million, and all its operations south of the border, this really is an orphan stock.  ASC’s provide scheduled surgical procedures in a limited number of clinical specialties, which enables them to develop routines, procedures and protocols to maximize operating efficiency and productivity while offering an enhanced healthcare experience for both physicians and patients.  

We became interested when the company initiated a local marketing campaign for certain clinical specialties which drove very significant revenue growth.  The company reported revenue for the quarter end June 30, 2013 of $5.8 million – recently they reported MONTHLY revenue for December 2013 of $5.3 million. 

The company also announced that it was in the lead position to acquire two ASC’s out of bankruptcy in December.  With a successful marketing campaign in place and the opportunity to buy additional ASCs at an opportunistic price, we participated in a private placement with the company acquiring common shares at $0.80 and a half warrant with an exercise price of $1.10. Northstar announced on December 12th that they were the winning bidder for a surgery center in an upscale Phoenix suburb, however they also announced that they had turned down the opportunity to buy the assets for a Dallas surgical center as the purchase price exceeded the centre’s intrinsic value.  Clearly, our type of people!

This opportunity fitted right into our circle of competence as Pender had previously owned and operated the Carepoint Medical Centers in Vancouver.  We acquired the medical centers out of bankruptcy in 2004 and sold them to a company looking to consolidate medical centers in 2006, resulting in a handsome profit.

Portfolio Updates

While a buoyant stock market helped performance in the quarter, it also gave us the opportunity to exit and reduce weightings in 24 companies.  We added six new investments for the Fund in the quarter that meet our rigorous investment criteria.

It is also worth noting that after decreasing our position size in Redline throughout the year, we doubled our position in December by taking advantage of some end of year selling.

The cash position in the Fund moved down to 14%, approximately the average cash weighting we’ve had since inception, so if the world ends with the potential US government shutdown, I’m going bargain hunting. 

David Barr, CFA
January 13, 2014