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Canadian cyclical stocks

Darcy Paterson

May 9, 2021  
Cyclicals, Members Only

As Peter Lynch suggests in One Up on Wall Street, timing is everything in cyclical stocks.

In April of 2020, I started selling my tech stocks. It’s not that I don’t love tech, it’s just that the valuations on energy stocks were too appealing to pass up.

One company that I was considering buying before the pandemic was Seven Generations Energy. It was a Canadian gas producer that was recently acquired by Arc Resources.

Before the pandemic the company was trading at less than book value and had an improving return on equity that was over 10% for nearly 3 years. The stock was sitting just below $7/share. I thought the company was worth at lest $14/share.

When the pandemic began and oil prices declined, its share price declined to about $2/share. That’s when I remembered the saying by Warren Buffet, “Be greedy when others are fearful and fearful when others are greedy.”

I didn’t buy much at first. After a few weeks, the share price started picking up and I saw that a lot of insiders were buying not just the equity but the debt as well. Seeing the CEO buy equity and debt boosted my confidence in the company so I began buying more.

About a year later now, and the company has merged with Arc Resources to make one of Canada’s largest gas producers. It’s not as cheap as it was in April of 2020 but it’s still cheap. Gas prices are proving to be resilient and oil prices are high. This combination is yielding cash flows not seen in 5-6 years.

Good times ahead for Canadian energy producers.