Despite the ACE Fund’s unit price remaining relatively flat (-0.1%) in July, underneath the surface there was much more excitement. The summer months can be very volatile and difficult to decipher given the lack of liquidity in the market, particularly for our small-mid cap positions. We believe that it is often best to just hold steady on your long positions until you hear news that matters instead of selling because “someone must know something”. We have been using the current round of quarterly reports as our guide and have had over 80% of our holdings reporting in the last three weeks. August so far looks to be a very promising month as the operational results released by most of our positions have exceeded market forecasts. Looking at the Canadian market overall we have been very encouraged with the results this quarter as earnings expectations have been exceeded by an average of 5.2% which represents earnings growth of 22% year over year.
With respect to our individual positions, we had very favorable quarterly reports and operational updates from both Easyhome (one of the stocks we have featured on our website as a “top pick”
) and from Open Text which drove their stock prices up 19.0% and 18.4% on the month, respectfully. On the negative side, despite no news from the company and only positive news from the industry, we witnessed the shares of Essential Energy Services decline 17% in July. This was particularly frustrating as we remain very bullish on this company’s prospects over the next few years (we did take advantage of the decline to acquire a few more shares). As of the date of this update and subsequent to the month end, Essential has now reported their second quarter results and the stock has since rallied over 16%.
We are always actively looking for new ideas and have recently added a new US name to the portfolio, an ethanol producer named Green Plains Inc., which we believe can take advantage of the current depression in corn prices (-16% in 2014) to generate extraordinary profits over the next few quarters. They have also proven to be an excellent consolidator within this industry and we believe that it is likely they will use this period of high free cash flow to add capacity. Just this morning they announced a 100% increase to their dividend and a large share buyback which is always welcome news. Similar to our short position in Potash Corp, which we recently covered for an 8% gain, this investment is more “tactical” in nature as we watch to see how industry and regulatory events play out within the ethanol market in the US. For now though, it appears that all of the inputs are lining up perfectly for continued strength in the stock.
Also, for those so inclined we have produced the Fund’s first set of Financial Statements, for the semi-annual stub period ending June 30th, 2014. You may access these from the link in the “Downloads” section at the top right of this email. The ACE Fund produces statements for unitholders twice a year, an unaudited set of semi-annual statements at June 30th and an audited (KPMG) set of annual statements as at December 31st.