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Recently read about a Canadian Fund managed by a guy out of San
Francisco. I didn't see a word about oils, but he made some comments
of what he looks for when buying into companies. There are a few
points he makes which rang a bell in a few things I have said in the not
to distance past. Read what he says about U.S. influence in the trading
of a given company. One of the oil's I really like is Stampeder Exploration
and have said the NYSE listing coupled with their acquisitions and past
growth record will generate interest with institutions in U.S. and propell
the price upward and onward. This fund manager's logical thinking
bears out my perspective.
Following is a copy of the article.
How one Canadian stock fund beat the market
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Canada is finally getting its day in the sun. After years of underperforming other markets, our stock market is roaring ahead with seemingly unstoppable momentum.
The Toronto Stock Exchange 300 index is up more than 25 per cent in the past 12 months and quite a few Canadian equity funds have done even better than that.
One of the best performers is the $280-million Canada Growth fund offered by GT Global. It has posted a 42-per-cent gain over the past 12 months and is up 53 per cent since its inception almost two years ago.
Interestingly, the fund is run out of San Francisco by portfolio manager Derek Webb. So far, he's proving that you don't have to be based in this country to manage Canadian equities successfully. And he's done it with an investing style that's a little different from the crowd.
While some mutual-fund managers preach a patient buy-and-hold strategy and others try to rotate their holdings through different stock sectors as the economy changes, Webb follows a different set of rules.
The first is that he never buys a stock on the basis of future potential. "We look at earnings-per-share growth right now, not at expected growth in the future."
The second part of the strategy is that he buys only those companies that are showing faster-than-expected earnings growth and "positive surprises." And, profits must be growing faster than the stock's value.
The flip side of this is that he will immediately sell a stock with a disappointing quarterly earnings report, even if that company has been doing well. Stocks reporting a negative-earnings surprise might recover, he concedes, "but they'll usually go down for a long time."
"Think about any successful company. When business is good, it's usually good for a long time. When it's bad, it's usually bad for a long period of time. Anything good or bad is usually not a one-quarter phenomenon.
"We've bought and sold (telecommunications company) Newbridge Networks Corp. a number of times. When we see a problem, we get out because we don't know if it's going to be a big problem or not. If we see that problem go away, we'll get back in."
Webb's third rule is to buy or sell based on the earnings estimates of U.S., rather than Canadian, analysts. That's right - when it comes to Canadian stocks, it's American opinion that really counts and that's not just because he lives in San Francisco.
"It is very important to pay attention to what people in the U.S. are thinking because they are so significant in pushing around stock prices," he says. An example of this occurred last week when Canadian bank stocks soared after a favorable report on them by Wall St. giant Morgan Stanley Inc.
"I see it happen over and over again. If one analyst in the U.S. puts out a buy recommendation on a stock , it will wipe out eight (Canadian) analysts who were lowering their numbers on the stock and had 'sells' on it.
"If an analyst at (U.S. broker) Goldman Sachs doesn't like Newbridge and everybody else in Canada likes it, that stock is going to get crushed. There's so much more money in the U.S. - and U.S. money moves a lot quicker than Canadian money."
Webb's final rule of thumb is to follow the relative strength of a stock vs. the rest of the market. This is a measure of which stocks do better than the market as a whole.
He argues that these investment criteria have paid off over time. A computer model shows that in the past 12 years, this investment approach for larger-cap stocks (without trading costs) produced returns of 20 per cent a year compared with 7.9 per cent on the TSE.
"The value of looking at those things is so significant," Webb says. "We're trying to look at the market more academically. Let's not just assume we're smart guys and can pick stocks. We have to manage risks and be disciplined about it.
"My job is to beat the index and make as much money for my clients as possible. That's the way I look at it. And this works. Forget all the hocus-pocus, it's just logical. We're buying those businesses in Canada that are doing the best and constantly beating expectations."
Webb owns between 30 and 50 stocks, believing that concentrating on a handful of stocks is the best approach.
"We've done our work on these companies so we want to own the things we feel most comfortable with. And we want to bet it big because that's how you make money for your shareholders."
About a month ago, Webb started buying Canadian bank stocks and he's been rewarded by a 20-per-cent pick up. Current holdings also include gold-mining companies Bre-X Resources and Greenstone Resources, software developer Cognos Inc., telecommunications equipment-maker Northern Telecom, biotechnology companies Biochem Pharma and Biovail and transportation company Canadian National Railways.
He recently sold telecom stock Newbridge Networks near the top of the market, making about 100 per cent on his investment.
Webb says this investment approach requires constant monitoring. "It means you have to manage it every day and be very disciplined on the buy-and-sell side.
"We don't look at sentiment, we don't speculate, we don't market-time, we don't try to guess. We just look at the bottom line.
"We're not the only guys who do this, I don't want to leave that impression. Fund companies in the U.S. like 20th Century figured this out a while ago and the results are there."
In observing the Canadian investment scene, Webb notes that GT's parent company, the $100-billion Liechtenstein Global Trust, is heavily overweighted in both Canadian stocks and bonds, a sign of foreign-investor confidence in Canada.
Low inflation, falling interest rates and a current account surplus are attracting money from abroad. "What we see is what everybody else sees."
-Our recent column on escalator bonds or "step-ups" generated a reaction from Clifford Noonoo, vice-president and managing director at TD Evergreen in Montreal.
Noonoo took exception to our criticism of an Ontario Hydro U.S. step-up note sold by the investment dealer. "We do not support all step-up note issues but we do feel that some of these issues have merit.
"Despite the fact that the Ontario step-up is callable after Year 2, we feel that the (yield) spread warrants this investment." His calculation shows that investors get a bigger yield premium on the step-up vs. U.S. treasury notes than they would if they held a normal Ontario Hydro bond. |
