Cantech Letter interviews Steve Palmer of AlphaNorth Asset Management

Palmer: "Equities remain very cheap relative to other asset classes and relative to historical norms. The correction we have experienced over the summer has set the stage for a strong rebound over the balance of the year."

In his own quiet and unassuming way, Steve Palmer is becoming one of the most talked about names on Bay Street.

How did your portfolio do during “The Great Recession”? If you had the foresight to invest in his AlphaNorth Partners Fund in 2008 you wouldn’t have merely survived the downturn, you’d have nearly four dollars for every dollar you had invested. Recently, Palmer began to focus more on the downtrodden Canadian technology sector. We talked to him about that and his feelings about the second half of 2011.

Steve, you recently began to scale back The AlphaNorth Partners Fund’s exposure to the resource sector and move into technology stocks. Why are you doing this?

SP: We scaled back resource exposure earlier in the year because we
thought the sector was a little overheated and that certain non-resource names offered better risk/reward.

Do you believe the process of placing value on a mining stock is the same as finding a valuation for a tech stock, or do you approach
them differently?

SP: Valuing junior mining stocks is highly subjective. These companies don’t have revenue so conventional valuation metrics don’t apply. Share prices of these companies are primarily driven by milestones and company promotion. Technology companies quite often have less variables involved in the valuation process. At the end of the day one has to make some assumptions to arrive at a future level of profitability and discount the value back to the present.

It seems you are not afraid to swing for the fences and invest in more speculative issues. How would you characterize the way you invest in the tech sector right now? Are you looking for big ideas, big value, or both?

SP: We typically look for companies which have the ability to grow revenue very rapidly over a short time frame. These are more growth orientated investments which can achieve returns measured by “x” vs “%”.

A poll we are running right now on Cantech Letter asks our readers “Will 2011 be the year Canadian technology stocks finally rebound?” or “Will the TSX will always be a mining and metals exchange?” Some people forget that Nortel alone once accounted for 36% of the entire value of the Toronto Stock Exchange. How would you vote in the poll?

SP: I don’t think there will be much change in 2011. Resource shares currently offer improved risk/reward as many companies have seen their share price decline significantly from the highs in Q1/11.

Do you imagine technology as a sector heating up in Canada, or do you think it will be a stock pickers market with sub-sector flare ups?

SP: Technology will remain a stock pickers market for the foreseeable future. There have been several great performers in the past year such as Intertainment Media, Wi-Lan, etc

Can you tell us about some of the Canadian tech stocks you like right now?

SP: Zecotek (TSXV:ZMS) and Functional Technologies (TSXV:FEB) are a couple of my favourite names right now. Both of these have quite unique products and the share price has the ability to increase many times once they achieve the next couple milestones.

Your AlphaNorth Partners Fund was up 160% in 2009, 113% in 2010 and in a tough market this year you’re already up 30%. In your June review you said you are excited for the second half of the year, why is that?

SP: Once the US debt situation is resolved, the negative press will turn to corporate earnings which have been very strong. Equities remain very cheap relative to other asset classes and relative to historical norms. The correction we have experienced over the summer has set the stage for a strong rebound over the balance of the year.

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