Talking Tech with AlphaNorth's Steve Palmer

AlphaNorth's Palmer on Zecotek Photonics: "Zecotek's current market value is only $35 million. We think the value of the lawsuit could be $200 million or more. The company also has a 3D screen technology which doesn't require glasses and a laser division. Each of these, if successfully commercialized could also be worth several hundred million dollars in value to the company."

In the button-down, “show me the dividend” world of Canadian money management, AlphaNorth’s Steve Palmer stands out.

Headed by Palmer, who was once VP of Canadian Equities at AIG Global Investments, AlphaNorth Asset Management simply demanded the attention of the street when it posted a gain of 160.6% in 2009 and followed that up with 113.6% to the upside in 2010. What’s the secret to his success? Dig into Palmer’s methodology and you’ll find he is more comfortable than many of his peers moving across sectors and sizes.

Sure, AlphaNorth owns its share of miners, but Palmer has proven to be just as comfortable with biotech, social media, or IT. With a 2.4% gain, 2011 was a bit of a misstep for the AlphaNorth Partners Fund. But after posting a 7.7% gain in just the first two months of 2012, Palmer seems ready to prove that was an aberration. Recently Cantech Letter caught up with Steve Palmer to focus on his interest in tech.

Steve, the AlphaNorth Partners Fund was up 7.7% through January and February of this year. Do you think the fund have another remarkable year like 2009 or 2010, or is the market too flat for that to happen?

I obviously can’t promise investment returns but several metrics are lining up which point to a very strong year, possibly as strong as 2010. Historically, it has always been after periods of significant decline that we have had our best years. In 2011, the S&P/TSX Venture index declined 35.1%.

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What’s the average market cap of a holding in your funds?

The AlphaNorth Growth Fund, our new mutual fund, targets companies with a market cap of between $100 million to $1 billion. Currently the average market cap of investments in this fund is $600 million with the median being $213 million. The AlphaNorth Partners Fund, our long biased hedge fund, focuses on smaller companies below $100 million market cap.

What is the mix between tech and resource stocks? Are you adding more techs?

I like to maintain a balance of tech versus resource stocks in both funds. The AlphaNorth Partners Fund has averaged approximately 58% in resources since inception in 2007. Currently, the AlphaNorth Growth Fund has an overweight position in resources.

What do you think is the potential of Zecotek Photonics (TSXV:ZMS)? The company has taken legal action to defend its patents, do you think that strategy could create value for shareholders?

What I like about Zecotek is that they have multiple initiatives each of which could have a significantly positive impact. The lawsuit could have a substantial impact. Zecotek’s current market value is only $35 million. We think the value of the lawsuit could be $200 million or more. The company also has a 3D screen technology which doesn’t require glasses and a laser division. Each of these, if successfully commercialized could also be worth several hundred million dollars in value to the company.

What about Functional Technologies (TSXV:FEB)? How large a market is that company addressing?

The market for yeast used in baking is in access of $2 billion. Functional Technologies yeasts virtually eliminate acrylamide in processed food. Acrylamide is a known carcinogen. The company has been working with several major companies on this front and we believe it is only a matter of time before one or more of these majors take this to the next level.

Any other techs you are following closely?

Merus Labs (TSX:MLS) is another non-resource company that I like. Merus has recently acquired several approved drugs which have current sales. The company trades at a very low valuation and should generate earning this year and continue to acquire non-core drugs from big pharma. Paladin Labs has a similar business model and trades at approximately double the valuation of Merus.

Disclaimer: Zecotek Photonics is an annual sponsor of Cantech Letter.

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