A brief mention in the July 10-24 Canadian Business Mag. (Bolded by me for ease in locating)
What the buy guys buy
Five of Canada’s top fund managers say there’s still steam left in the economy. Here are their tips for keeping your money boiling
By Andrew Wahl | July 10/24, 2000
We’re all looking for that hot stock that will make our portfolios sizzle. Unfortunately, that’s a lot tougher than it sounds. So we turned to five of the best money managers in Canada to find out where they’re investing their cash. These guys are no slouches. Over the years, they have made a killing off the market. Take Glenn Paradis, who manages the $563-million Transamerica Growsafe Canadian Equity fund. As of May 31, 2000, he has a 12-month return of 82.9%. That’s more than just a short-term lucky streak. His fund has a five-year compounded rate of return of 25.2%.
Then there’s Bob McWhirter, who manages $1.7 billion worth of technology equities for three of Royal Bank Investment Management Inc.’s funds. We also polled Allan Brown, whose $2.8-billion Investors Group fund consistently ranks in the top quartile of Canadian equity funds. On the small-cap side, we turned to Peter Hodson, the manager of $42 million in assets for Synergy Asset Management Inc.’s Canadian Small Cap Class fund, which ranks in the top quartile for one- and two-year returns. Finally, we talked to one of the best value managers around: Fred Pynn of Bissett & Associates Investment Management Ltd. in Calgary.
Despite their diverse investment perspectives, all our stock pickers are sure about one thing: the good times aren’t about to end anytime soon. "If we have a continuation of the global economic expansion, that’s very positive for Canada," says Pynn. "Canada is a late-cycle performer: we still have a lot of resource-based industries and basic manufacturing–those businesses will do well. I think 2000 is going to be a great year for the majority of businesses in Canada." As for Paradis, he is expecting the TSE 300 to be up about 15% over the next year. "That would be a letdown for a lot of people, but I think it would be fairly good."
As to which stocks will thrive and which will suffer–well, that’s where opinions diverged. Not surprisingly, all managers stressed the need to find reasonably priced shares with solid growth prospects. But when we asked them to choose their five favorite companies, very few of the names were the same. From speculative tech plays to cautious bets on financial services, here are the stocks that they are loading up on. Maybe you should, too.
--------------------------------------------------------------------------------
BOB McWHIRTER
Royal Bank Investment Management Inc.
As far as Bob McWhirter is concerned, you’re best to start looking at high-tech stocks. "We’re still expecting that technology and the broad, New Economy will continue to experience growth that is in excess of GDP growth, probably by a factor anywhere from three to seven times," says McWhirter. "If you’re after growth, you have to look at technology." You should listen: few managers in Canada know tech as he does. As of May 31, he had an impressive three-year record of 361.9%, bettering the TSE’s hardware sub-index’s 282.7%. He does it by tracking 83 stocks through quantitative, computer-assisted screening, and follows end-of-day prices on 300 Canadian and US stocks.
This constant number-crunching and stock-comparison makes McWhirter very price conscious–he is skeptical of price-to-forecasted earnings ratios higher than 150. "Things change quickly in the technology patch, and 18 months is almost like the nuclear half-life of some of these technologies," says McWhirter. Instead, he likes to look just six to 12 months in the future and see what is still undervalued today .
What he sees is good news for companies like C-MAC Industries Inc. (TSE: CMS). Since C-MAC assembles Nortel’s optical systems (among other products), it’s a great way to play Nortel’s growth and the boom in networks technology without ponying up for Nortel’s pricey shares. C-MAC also comes with the benefit of having a very low profile. That may soon change: a new CFO is being hired and there is potential for a cross-border financing that will help it on the acquisition side. This, combined with what McWhirter predicts will be upward revisions of Nortel’s growth expectations, might translate into $2.8 billion or $3 billion worth of sales for C-MAC this year. Another underappreciated high-tech contract manufacturer that McWhirter thinks will hit the limelight is Aim Global Technologies Co. Inc. (TSE: AGT) of Vancouver, which has $150 million worth of sales backlogged.
Two other favorites are both semiconductor-related. Mitel Corp. (NYSE: MLT) makes communications chips for analog, wireless and radio-frequency tuners for set-top boxes. Plus, they’re deep into the Bluetooth standard, which is going to create automatic wireless links between devices such as your PalmPilot and your desktop computer. McWhirter also likes GSI Lumonics Inc. (TSE: LSI). GSI makes lasers that burn identity markings into computer chips, which helps to improve efficiency on the production line.
Lastly, McWhirter highlights the unlikely CAE Inc. (TSE: CAE), the leading manufacturer of flight simulators–a $500-million to $600-million business in which it has grabbed about 80% market share. But now CAE is also getting into pilot-training services, a market that could be 15 times larger than making simulators. In McWhirter’s analysis, it’s a classic sleeper.
--------------------------------------------------------------------------------
PETER HODSON
Synergy Canadian Small Cap Class fund
Here’s Peter Hodson’s secret to investing in a small-cap company: worry about its management, its strategy and how it will compete, but ignore the market fluctuations. That’s why he likes Ottawa-based Tundra Semiconductor Corp. (TSE: TUN), a maker of chips for network vendors. When it went public in March 1999, it had won 300 design contracts, and now it has more than 1,000–a tripling of future potential business in only one year. "It has enough in the bag that its revenue growth looks fairly assured for the next three years," says Hodson. "Stock goes up, stock goes down, but I know that quarter after quarter there aren’t going to be problems as far as earnings or revenue growth."
Similarly, he’s followed Patheon Inc. (TSE: PTI) for seven years, and it was the first stock he bought for the Synergy fund a year and a half ago. "I call it a Rip van Winkle stock because of any stock you don’t have to worry about, this has got to be the one." Patheon is a third-party manufacturer of drugs, which is a blissfully stable industry thanks to controls over which companies can make drugs and long-term contract relationships. Hodson predicts a 70% growth rate for fiscal 2000, but the stock is trading at only 28 times this year’s earnings.
Another company Hodson has a cute nickname for is Silicon Storage Technology Inc. (Nasdaq: SSTI), which he calls a "double whammy." The US-based company manufactures flash memory chips for cell phones and pagers, which is a sector that is expected to grow at 100% per year over the next few years–but Silicon Storage’s revenue is growing at 300%. "You just know it’s doing something right," says Hodson.
Hodson also likes to bet on companies with technology that could become a standard. One favorite is Global Thermoelectric Inc. (TSE: GLE), which is working on solid-oxide fuel cells that convert natural gas into electricity and water–something Hodson thinks has a better chance of taking off than the hydrogen-based cells. Its existing business, manufacturing generators and heaters, is already profitable, while the cost of producing its cells keeps going down. He’s also put money into Wi-LAN Inc. (TSE: WIN), a Calgary-based wireless broadband company that’s trying to convince big names like Nokia and Ericsson to buy its technology. "It hasn’t got there yet," cautions Hodson, "but it has the potential to become a mini-Qualcomm if the world adopts its technology."
--------------------------------------------------------------------------------
GLENN PARADIS
Transamerica Growsafe Canadian Equity Fund
As exceptional as his fund’s gains have been over the past year, Glenn Paradis’s record from March through May isn’t very pretty. While he’s riding out a disastrous three-month return of -26.6%–the result of choosing to only slightly reduce positions in some high-flying techs in favor of conservative financials–Paradis is unshaken in his belief that the greatest growth opportunities lie with technology stocks. He’s counting on the Federal Reserve to end the upward pressure on interest rates late this summer or early fall. "That will be positive for the techs, positive for financials and I think biotech and pharmaceuticals are very good growth areas," says Paradis. "Those are the three areas we’re focusing on."
At the top of his list are two of Canada’s biggest blue-chips, Nortel Networks Inc. (TSE: NT) and Toronto-Dominion Bank (TSE: TD), which is his only bank holding. "TD is far above the rest of them," he says, pointing to its combination of strong management, growth platform for the US and globally, and the exceptional fundamentals of TD Waterhouse. "Do I think it’s going to be the top performer in the fund? No. But I think it’s going to be a good performer as the market starts to get a little more active."
As for Nortel, Paradis thinks the stock still has a lot of upside: its optics division is growing at 100%-plus, its access business is doing the same and he’s keen on Nortel’s new foray into undersea fibre optics. "The growth in these networks is probably going to last three to five years before we get a decent build-out," he says. And it’s exactly the same reasoning he has for his confidence in fibre-optic manufacturer JDS Uniphase Corp. (TSE: JDU).
He’s also a big believer in wireless, which is why he backs names like Sierra Wireless Inc. (TSE: SW), the Burnaby, BC-based wireless modem manufacturer, and wireless encryption software designer Certicom Corp. (TSE: CIC), based in Hayward, Calif., which is well-positioned to hold the encryption standard for wireless e-commerce. "It’s obviously a risky one," says Paradis of Certicom, "but I think as the future unfolds, that one is going to be a key holding."
--------------------------------------------------------------------------------
FRED PYNN
Bissett Canadian Equity Fund
Of the five managers, Pynn is the only one who doesn’t have the hots for tech stocks–and it shows in his returns. Over the past 12 months his fund has returned 19.1%. Not bad. Compared to many tech funds, however, it’s a little disappointing. But don’t expect Pynn to apologize. "It’s not that we’re anti-technology. It’s more valuation-driven," says Pynn. "I think technology is here to stay, but I don’t think you can make blanket statements that it’s the wave of the future, so you’ve got to loadup on 100% tech stocks. Sometimes good companies or good industries can make poor investments because of what you have to pay to get in the door." Instead, Pynn is choosing to be patient, waiting for tech-stock prices to retreat a little further and for management to establish an earnings track record.
Until then, Pynn is opting for a diverse selection of Old Economy stocks that investors are rediscovering: he’s overweighted in oil and gas, consumer products, merchandising, transportation and financial services. For instance, Suncor Energy Inc. (TSE: SU) is among his top picks. And while it doesn’t hurt that oil and natural gas prices are looking up, Suncor doesn’t really need that kind of help for growth. "It’s an extremely low-risk growth profile," says Pynn. He points to an incremental expansion under way in an existing plant in northern Alberta, which will substantially boost production without relying on cyclical commodity prices.
Pynn also stresses that many of the companies he invests in have international operations, or draw most of their revenue from exports. That’s why he likes Power Financial Corp. (TSE: PWF), not only because of its steady 20% increase in revenue, earnings and dividends year over year, but also because Power’s major holding, Great-West Life Assurance Co., has a very large operation in the US–and is still expanding. "I don’t lose sleep about that one," says Pynn.
Similarly, he says Four Seasons Hotels Inc. (TSE: FSH) is a Canadian company that gets virtually all of its profits from properties in Europe, the US, the Caribbean and Asia–it operates only two hotels in Canada. And it, too, is embarking on an aggressive expansion plan, hoping to increase the number of rooms under management by as much as 20% a year for five years. The same goes for Canadian National Railway Co. (TSE: CNR). While its price has suffered from weakness on concerns that its proposed merger with Burlington Northern Santa Fe Corp. (NYSE: BNI) is off track, Pynn isn’t worried. Even if the merger doesn’t go through, CNR still has plans to integrate its shipping systems with Burlington all across the continent–not just east-west, but north-south. This will continue to drive down costs.
--------------------------------------------------------------------------------
ALLAN BROWN
Investors Group Summa Fund
Allan Brown makes no apologies for having an eclectic portfolio peppered with names you might not recognize. "Let’s face it, in this market the valuations are high on all those companies that are well known," he says. "Yeah, they are great companies, but at 25 times sales and 200 times earnings, there’s no margin for error. They have one bad quarter and you instantly lose one-third of your investment. On the other hand, can the stock double or triple from there? Highly unlikely." Instead, Brown digs for undiscovered gems. "To make money in the stock market, you’ve got to buy companies that are unknown, buy them early and wait until they become known," he says. "You’re not going to make 10 times your money on Nortel unless you hold it for 20 years."
So what does he like? For one, Keithley Instruments, Inc. (NYSE: KEI), a company based in Cleveland that makes equipment to test the kind of optical systems made by Nortel and JDS Uniphase. What’s more, every cell-phone battery in the world is tested by a Keithley instrument. The stock, of which Investors Group holds 20% and is its largest shareowner, is already up some 300% on the year, but it’s still trading at only 30 to 35 times next year’s earnings.
Another relative unknown that Investors Group has a big chunk of is International Rectifier Corp. (NYSE: IRF), based in El Segundo, Calif. It makes power semiconductors, a fledgling technology that Brown thinks will only grow in demand as small devices require increasingly efficient batteries. IRF’s technology can already be found in Sony Playstations and it is making deep inroads into the cell-phone market. "It has a very, very low-risk profile, but it has at least as much, if not many times more upside than a Nortel," says Brown.
He also likes SanDisk Corp. (Nasdaq: SNDK), a Sunnyvale, Calif.-based maker of flash memory cards for MP3 players and digital cameras that he predicts will have $1 billion in revenue next year. "It’s a huge company that’s relatively unknown," he says. "The reason why is not too many people have an MP3 player or a digital camera yet." But once Christmas comes around and digital cameras improve in quality and drop in price, and the MP3 player gets out there, Brown’s betting SanDisk will be a winner.
Now, you may have noticed an odd trait common to those three companies: none of them is Canadian. "One of the issues for me is I’d love to invest more in foreign companies," Brown says. "I don’t want to dumb down my portfolio and add risk just to put in Canadian tech names." So because he’s still limited by foreign-content restrictions, a current favorite is Alcatel Networks Corp. (TSE: AT), the Paris-based maker of network telecom equipment that bought Kanata, Ont.’s Newbridge Networks Corp. this past winter. For Canadian investors, the great benefit of the deal is that for the next five years, the top maker of DSL network technology and a new competitor in optical products is up for grabs as Canadian content on the TSE. There is one Canadian stock, however, that makes the grade for Brown: Cognos Inc. (TSE: CSN), the No. 1 player in business intelligence software. "Those are five companies that you could own and probably forget about for five years," says Brown. Now that’s what every investor wants to hear.
End of article
Rondo |
