From today's National Post:
nationalpost.com
Small caps on a strong spurt
Look to quality emerging growth
companies
Sonita Horvitch
Financial Post
The very high valuations on Canadian big-cap stocks and the return
to favour of the smaller-cap segment of the market should
encourage investors to consider high-quality emerging growth
companies, says Francis Roche, president of Roche Securities Ltd.
in Edmonton.
"After a dismal two to three years, small-cap stocks have finally put
on a strong spurt."
Mr. Roche continues to champion the junior energy sector, which
he recommended in the column on April 14 when the oil price was
around $16.40 (US) a barrel. The case is even more compelling
now, he says, given that the price has risen above $24 (US) a
barrel.
He also favours select technology stocks "given their ability to
generate above-average growth rates." He is particularly
enthusiastic about a number of Internet-related companies -- stocks
he says still enjoy good momentum -- but he is being selective.
Specifically, he likes "clicks and mortar stocks" or sound businesses
that are increasing their revenue through Internet applications.
The full-service brokerage firm, founded in 1993, specializes in
raising capital for Canadian emerging growth companies.
From the oil and gas sector, he has chosen:
- Compton Petroleum Corp. (CMT/TSE) , which had a recent
close of $2.70 and trades in a 52-week range of $3 to $1.20. The
Calgary-based firm explores for and produces oil and gas in
Western Canada. Its properties are slightly more leveraged to
natural gas.
The company recently announced "impressive second-quarter
results with a doubling of revenue and cash flow." Mr. Roche
believes this is because it has been able to show consistently strong
drilling and production results in southern and central Alberta.
He likes the company for its ongoing strong operating results, its
excellent drilling success rate (70%) and its extensive land position.
His cash flow forecast for the company is 45¢ a share for 1999 and
65¢ for 2000.
- Cypress Energy Inc. (CYZa/TSE) $6.90 ($7.90-$3.25). Also
based in Calgary, this company explores for and develops oil and
gas in Western Canada and also has a bias toward natural gas
production. During the first half of 1999, the company drilled an
impressive 28 wells, says Mr. Roche. Year to date, it has made four
strategic acquisitions for a total cost of $100-million, he notes.
He favours the company "for its proven ability to grow through
acquisitions, its large undeveloped land base and its sound financial
position." He estimates cash flow of 95¢ a share for 1999 and
$1.25 for 2000.
In oil services, Mr. Roche continues to recommend Wenzel
Downhole Tools Ltd. (WZL/ASE) $1.90 ($2.05-85¢). It was one
of his selections in April when the stock was trading at $1. This
company manufactures, sells and rents down-hole drilling tools for
the energy sector.
"The strength of the commodity prices is encouraging a hike in
drilling activity which is expected to be up some 50% in the year
2000 over this year," says Mr. Roche. Wenzel has expanded its
product line to include "an impressive range of highly sophisticated
drilling motors and it has secured international channels for its
products."
Turning to the tech sector, he has chosen:
- CryptoLogic Inc. (CRY/TSE) $16.50 ($28.50-$4.85). The
Toronto-based firm focuses on "state-of-the-art Internet software
applications for both electronic commerce and Internet gaming."
Its gaming software is sold in a number of countries and is available
in English, Spanish and Japanese. "CryptoLogic is a profitable
Internet play that trades at a very modest six times trailing earnings,"
says Mr. Roche.
For the more aggressive investor, he is recommending a new
company with huge growth potential:
- Travelbyus.com Ltd. (TBU/TSE) $1.73 ($2.30-4¢). Based in
White Rock, B.C., the Internet travel booking service "is a play on
two growth businesses -- the Internet and travel."
The company recently raised $12-million in senior debentures and
warrants and is planning to buy several complementary travel
businesses in the United States. "Management's objective is to have
the most comprehensive travel Web site available," he says.
Statistics show that about 30% of travellers search the Internet for
travel information, says Mr. Roche, "and more and more people are
making travel-related purchases over the Internet."
As a special situation stock, he continues to recommend Arctic
Group Inc. (AGP/ASE) $1.50 ($2.35-$1.25), which makes and
distributes packaged ice and water products in Canada and the
United States. This stock was a recommendation in the column in
December, 1998, at $2.
"Arctic Group is well financed, is making a large number of
acquisitions and is a major player in this field." Mr. Roche expects
the hot summer of 1999 in Eastern Canada and the U.S. Midwest
and the east coast to translate into strong earnings and revenue
performance for the company in its fiscal year ended April, 2000.
He has a "sell" recommendation on Canadian 88 Energy Corp.
(EEE/TSE) $3.09 ($6.45-$2.95). It has a high debt load and he
says the Street has "some concerns about the strategic direction of
the company."
|
