The recent strength in equity markets has created wide valuation disparities, resulting in an excellent environment for active fund managers. Small- and mid-cap stocks continue to trade at a substantial discount compared with their large-cap peers, highlighting a segment of the market that offers investors a rich opportunity set.
By Jordan Zinberg, President & CEO, Bedford Park Capital
We’ve seen the persistence during 2023 of two ongoing themes: 1) Canadian stock indices lagging substantially behind their U.S. peers and 2) small- and mid-cap stocks on both sides of the border underperforming large-cap stocks. Given our fund’s focus on Canadian small- and mid-cap equities, I’m pleased to report that both of these trends reversed in the first quarter of 2024.
Notably, one of our other key takeaways from the first quarter was a significant increase in volume among the small- and mid-cap stocks that we follow.
The Bedford Park Opportunities Fund is off to a strong start in 2024, achieving its best first quarter performance in the fund’s history, and its second-best quarterly performance since inception. Furthermore, we are pleased to share that, in January, the Bedford Park Opportunities Fund was ranked #1 by BarclayHedge in their Equity Long-Bias category, with a return of 12.25% (net of all fees and expenses) for the month.
We have received several questions from both existing and potential investors inquiring as to what drove our considerable outperformance in the first quarter. While we have highlighted two of our top Q1 performers below, it is important to note that it was not one or two stocks, but rather the portfolio as an aggregate that resulted in the fund’s strong return for the quarter. For the first quarter of 2024, the Bedford Park Opportunities Fund gained 31.03%, net of all fees and expenses.
Bedford Park Opportunities Fund performance v Benchmarks
| Q1 2024 | |
| Bedford Park Opportunities Fund | 31.03%* |
| S&P/TSX Small Cap Total Return Index | 7.92% |
| S&P/TSX Small Cap Index | 7.23% |
Source Energy Services
Q1 2024 Total Return: 132%
Source: Bloomberg
After a stunning 216% return in 2023, Source [TSX: SHLE] did not disappoint in the first quarter of 2024, with a return of 132%. This is not the first time in my career that I have made a 10x return on a stock, but I believe that it is likely the first time it has occurred in such a short period of time.
My investment thesis on Source has not changed over the past year and a half: I believe margins will continue to expand, driving strong cash flow that will be used to reduce debt and strengthen the balance sheet. As this plays out, investor awareness will continue to grow, and the stock will re-rate to a higher multiple.
While Source’s share price has had an impressive run, I believe that we were fortunate enough to buy this stock in the “first inning,” and that there is still substantial upside to be realized. Accordingly, there are two major catalysts that I will be watching for this year. First, management has indicated that over the next few months they expect to announce a joint venture that will significantly expand production and revenue. Second, I expect the company to refinance their debt, resulting in lower interest costs and increased profits while eliminating any refinancing risk.
Foraco
Q1 2024 Total Return: 40%
Source: Bloomberg
Foraco [TSX: FAR] is a leading global drilling services contractor that operates across several major mining regions. This stock is a relatively new addition to our portfolio, and a glance at the chart above reveals that our entry point proved to be well-timed, given that we were accumulating stock in October and November of 2023.
The company has gone through a major transition over the past few years, with a new CEO taking over who has focused their footprint on stable jurisdictions, signed long-term contracts with Tier 1 customers, and identified areas to improve operating efficiencies. The result has been dramatically improved financial performance. Despite consistent growth in revenue and profits, expanding margins, and a significant reduction in financing costs, the stock continues to trade at a substantial discount to its peers. At the March 31st closing price of $2.87 per share, the stock was trading on just 5x our 2025 earnings estimate.
I’m often asked how I source ideas, and in this case, I was introduced to Foraco by one of our investors, a former Bay Street professional who is a very astute investor and now focuses on managing his own capital. I’m grateful to count a number of current and former Bay Street stars as investors in our fund, as they can be both a fantastic source for new ideas and a sounding board for existing positions.
Within a few minutes of looking at Foraco’s financial statements, I knew that we would likely end up owning the stock – the numbers literally jumped off the page. As we move through 2024, I’m expecting moderate growth in revenue but significant growth in profits, owing to operating leverage and interest cost savings. In addition, management has expressed the desire to get more active in the US market and is looking at potential platform acquisitions to enhance their U.S. presence. The company has been working hard to improve investor awareness, and I believe we will likely see new analysts pick up research coverage sometime this year.
Our portfolio companies reported a very strong set of Q4 2023 results, and I expect the strength in operating results to continue when we begin to see Q1 2024 results in late April. I look forward to writing our next letter to you in July, when summer will be in full swing!
All the best,
Jordan
* Based on time weighted rates of return for lead series (series 1), net of all fees and expenses. Past performance is not indicative of future
results
Podcast: Picking Canadian Small Cap Winners with Jordan Zinberg | Ep.114
Jordan Zinberg is the President and CEO of Bedford Park Capital Corporation. Jordan has over 15 years of investment industry experience including portfolio management and trading, and has served as a director of both private and public companies. Before founding Bedford Park Capital, Jordan was a Managing Director and Portfolio Manager at a prominent Toronto-based investment management firm. Prior to that role, Jordan spent 7 years at one of Canada’s largest investment dealers. Jordan holds an MBA from the Schulich School of Business as well as several industry licenses and certifications. He also holds the Chartered Investment Manager designation and is a fellow of the Canadian Securities Institute.
