Canada's top stock picker not afraid to make tough calls
'Sell" ratings on two Canadian miners have helped Mike Parkin win recognition as Canada's top stock picker for 2012.
Just after downgrading North American Palladium Ltd. and Aurizon Mines Ltd. to "underperform," he recalled phoning their chief executive officers to tell them about the changes. It was an opportunity for him to explain the reasons behind his decision, but he was well aware that a negative rating might elicit some heated exchanges.
"It is probably the hardest call to make" in a day, especially if you have the lone "sell" recommendation, says the 35-year-old analyst who joined Desjardins Securities Inc. in March after more than 31/2 years at Bank of America Merrill Lynch Inc.
Mr. Parkin has been named the No. 1 stock picker in this year's StarMine Analysts Awards. His "buy" and "sell" calls generated a better return than his peers against his metals-and-mining benchmark in 2012, and resulted in a 21.3-per-cent "excess" return, according to the StarMine system.
StarMine, a unit of Thomson Reuters Corp., measures the performance of analysts based on the returns from all their ratings. The awards are given to the top 10 analysts based on how well each does within his or her own industry category.
Analysts are often reluctant to issue "sell" or equivalent ratings on a stock because of concerns that their lines of communication to company executives may be cut off, but some investment firms have policies that make it easier to maintain unflattering recommendations. "At Bank of America, there was a requirement that 20 per cent of your coverage had to be rated 'underperform,'" Mr. Parkin said.
An "underperform" rating can upset not just corporate management, but also money managers who own the stock, he said. "When you are out on your own [with a call], you certainly get a lot more attention from everyone. ... You can get heat from multiple sources."
The Port Perry, Ont.-born analyst says he became fascinated with the capital markets while studying for his MBA at York University in 2006-07. Before returning to school, he had worked for nearly five years at Stelco Inc. (now U.S. Steel Canada) after earning a mechanical engineering degree from McMaster University in Hamilton.
He began his Bay Street career as an equity research associate at Scotia Capital Inc., before being hired in 2009 by BofA Merrill Lynch, where he was promoted to a full-fledged analyst. He sees similarities between being an engineer and an analyst. "As an engineer, you basically train for four years to break a problem down, and provide the solution," he said. "In equity research, the task at hand is determining whether a stock is over-, under- or fairly valued, and make your opinion known to the Street."
His best call last year was maintaining an "underperform" rating on North American Palladium. In 2012, its stock fell to $1.34 a share from $2.61. "I was forecasting a fairly significant cash shortfall for the company" because of problems at its Vezza gold project in Quebec (which has since been sold) and its LDI palladium mine, he said.
Another good call last year was retaining an "underperform" on Aurizon. Its stock fell to $3.43 a share from $5 for a 31-per-cent decline. The company was acquired last month by Hecla Mining Co. "The Street was excited to get the results of the feasibility study at its Joanna project, but I was expecting the results to be disappointing" because of rising costs from a significant mill-design change, he said.
Mine tours play a role in his research. Over the past six years, Mr. Parkin has travelled to Mexico numerous times, but noticed fewer security guards around mines during a recent visit. The climate appears to be changing as president Enrique Pena Nieto moves away from his predecessor's preoccupation with hunting down drug lords to focusing more on the economy. Still, "I never felt that my life was threatened" during past visits, he said.
With the price of gold plunging and miners taking a beating, it hasn't been an easy year for precious-metals analysts. Investment demand for gold, a key driver for the price of the yellow metal, has fallen, while gold companies have been facing rising capital costs as a result of increasing energy prices and labour shortages, he said.
In his new job at Desjardins, he hasn't yet initiated coverage on any companies so he cannot talk about current "buys" or "sells". Unlike his former employer, there is not a structured rating system for stocks. "You don't have to have sells," he said. "You can have all 'buys' in a bull market, or be more negative in a bear market. It's up to you."
Find more rankings tables and hear what award-winning analysts have to say in videos and live discussions in the coming weeks at tgam.ca/starmine