Recommended in National Post's Buy and Sell Column today.
What follows is the text....
The U.S. equity market is having problems dealing with inflationary pressures and the prospects of a reduced flow of funds into the market, says Eric Sprott, president of Toronto-based Sprott Securities Ltd.
"There is a strong possibility that we are entering a bear market in the United States. If the U.S. equity market pulls back substantially, Canada will be affected," he notes.
His call is that inflation is likely to continue to present a challenge south of the border, given that the U.S. economy remains strong. This will likely require further short-term interest rate hikes by the U.S. Federal Reserve, which will likely hurt the equity market.
Sprott also argues that rising consumer prices reduce the level of individual savings unless wages rise to compensate for this. If they don't, then this diminishes the level of available funds and the flow of funds into the equity market. "Liquidity is key."
Still, this "cloudy market environment" brings with it some excellent stock opportunities.
On his recommended list:
- Tesco Corp. (TEO/TSE), which closed recently at $15 and trades in a 52-week range of $16 to $6.15. Based in Calgary, this international oilfield service company has pioneered a system of drilling with casing that is going to "revolutionize the drilling business." It is expected to produce significant cost savings for energy companies, says Sprott. His earnings per share estimates are 29¢ for 2000 and 61¢ for 2001. "The stock is not cheap, but the potential is significant." Sprott notes that the company could be a prime acquisition candidate for a U.S. drilling firm.
He continues to recommend two other energy services companies, NQL Drilling Tools Inc. (NQLa/ TSE) $8.10 ($9.85-$5.10), which produces and leases drilling motors to the energy sector, and CenAlta Energy Services Inc. (CEA/TSE) $7.50 ($7.60-98¢), one of the major well servicing firms in Canada.
Sprott recommended these two stocks in the column of June 17, when NQL traded at $8.45 and CenAlta at $6.35.
As a turnaround pick:
- Skyjack Inc. (SJK/TSE) $9.35 ($19-$5.25). Based in Guelph, Ont., this company designs and makes elevating work platforms used in a variety of construction and plant maintenance applications." The company recently made significant changes to its senior management, says Sprott, to "redirect Skyjack toward improved profitability." The company has also embarked on an "aggressive productivity enhancement program." This is starting to bear fruit, he says, in better than expected profits for its first quarter of 2001, ended June 30. "Considerable operating improvements have facilitated a return to profitability ahead of management's original schedule," says Sprott. The firm is calling for the company to earn between $1.80 and $2.07 for its year to March, 2001, versus a loss of 48¢ from ongoing operations for fiscal 2000. Sprott Securities' target stock price is in the range of $10.80 to $12.50 over the next 12 months.
- Direct Focus Inc. (DFXI/ NASDAQ) US$35 (US$38 9/16- US$11). Based in Vancouver, Wash., this company is a "leading" marketing company for fitness products. Its major product is its Bowflex line, marketed directly to consumers. Its newest product is Nautilus Sleep Systems, a combination of mattress and box springs that allows the user to adjust it to different degrees of firmness. The company also sells Nautilus commercial fitness equipment.
Sprott notes that an independent survey in the United States of 11,000 small companies rated Direct Focus the number one company in terms of sales growth, earnings growth and return on equity. "The company's direct business model, which includes e-commerce sales, is very successful." His earnings per share estimates are US$3.50 for 2000 and US$5 for 2001. The stock is cheap relative to its earnings growth rate, he notes.
On the sell side, Sprott is concerned about the viability of the business model of some major e-tailers such as Bid.com International Inc. (BII/TSE) $2.34 ($3.65-$2.26), the Canadian Internet online auction company; Amazon.com Inc. (AMZN/ NASDAQ) US$37 9/16 (US$113- US$27 14/16), an Internet book retailer; and Canada's Chapters Online Inc. (COL/TSE) $3.15 ($28-$2.50), another online retailer of books.
"The margins on these items are insufficient for these firms to make money at this business." So far, he adds, the consumer buying from Amazon and Chapters Online is not being charged for the full cost of completing the transaction.
Sprott Securities Ltd. may hold positions in the securities mentioned. |
