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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (43405)	6/22/2006 12:24:01 PM
From: Johnny Canuck	Read Replies (1) \| Respond to of 68385

StockHouse Q & A: Talking Small Cap, Energy, and Tech Thursday, June 22, 2006 By Q and A Portfolio manager gives his stock picks Peter Hodson is a senior portfolio manager with Toronto-based Sprott Asset Management. StockHouse: How have small caps been affected by the recent volatility? Peter Hodson: Generally it's affected them more than the mid- and large-caps. Two things have happened. You've had the flight to quality that almost always occurs when there's volatility in the overall market. Then there's the fact that people sell their winners first. But if, and when, the market recovers those tend to bounce back the fastest. I haven't quite seen that yet. SH: What factors do you consider when choosing a small cap? PH: Certainly management. My best play is to find an experienced management team, one that's spun out of a large company and takes some assets with them. The team then puts in its own money and does what it wanted to do at the big company, but was restricted from doing. I also like a company that's got a competitive advantage, be it a low cost or patent protection or is going into an area that nobody else wants to. The balance sheet - the financing ability is pretty important. I also try to find out if the company is growing faster than its industry peers. The least of my concerns is valuation. SH: Are there certain sectors that you like more than others these days? PH: I like pure industrial product names. You can get companies trading at nine, 10, 11 times earnings that are just being given away. The market is pricing them as if there's going to be a giant recession in the second half this year. Well, there may or may not be a recession but the economy doesn't change that fast. You don't go from 4% growth to negative growth in six months. SH: What companies in this sector do you like? PH: One is PW Eagle (NASDAQ: PWEI, BullBoards). It's trading at about four times forward earnings, has no debt, pays dividends and is doing a stock buy-back. They make PVC pipe used for water, sewage and oil and gas applications. It's just too cheap for a company that's got a pretty decent growth profile. Somewhat more on the commodity side is HudBay Minerals (TSX: T.HBM, BullBoards). It's trading at 3.5 times forward earnings and will be debt free this year. It will also likely institute a dividend this year. I can't predict what the board will do, but they'll have way too much money in about six months. SH: What if copper and zinc prices fall off dramatically? PH: Certainly HudBay is vulnerable, but they're probably more vulnerable from a psychological point of view than an actual earnings point of view. Commodity prices could level off but then I think you'll see a situation where the lower prices will lead to higher stock prices. If you look at past commodity price peaks you'll see that a commodity price peaks anywhere between nine and 21 months ahead of the stock. SH: What other sector do you like in the small-cap universe? PH: International oil & gas companies. The primary reason is the faster growth profile. Investors continue to pay high valuations for Canadian oil and gas exploration companies, but those are not the companies that have the big up-side potential. One small cap I like is Petrolifera (TSX: T.PDP, BullBoards). They're operating in Argentina right now, and they're going to Peru next year. The stock went quiet because they lost a couple of rigs, but they've re-secured them. They're doing about 6,000 barrels a day right now, and if they move into one more zone then it's a 33% increase. Very few Canadian companies could do that with one well. Another name I like is Calvalley (TSX: T.CVI.A, BullBoards). It's the same sort of thing, though more of a development story as opposed to an exploration story. They're in Yemen. And they're doing 10,000 barrels/day. They're likely going to 20,000 over the next 12 months. SH: What about technology small caps? PH: I think technology has got a bit of a bounce ahead of it, maybe not quite as in the olden days, but the sector has just been completely and totally abandoned. Nobody is doing anything in that sector and yet the earnings continue to sort of come through. Perhaps it's not a dot-com or anything like that. But even somebody like Com Dev (TSX: T.CDV, BullBoards). They've totally turned the company around. They've got a record backlog. Their earnings are accelerating, and the stock is still relatively inexpensive, because it's a space that no one has been gravitating towards. Another one is Sierra Wireless (TSX: T.SW, BullBoards). It's more of a turn-around story than anything else. Their last quarter was great and they've started to treat themselves as an ongoing company as opposed to spending money on all sorts of crazy ideas. Their products are getting much wider acceptance. SH: Do you like any chip companies? PH: One of my favourite names right now would be Rambus (NASDAQ: RMBS, BullBoards). It's the Mosaid (TSX: T.MSD, BullBoards) of the U.S. They license their technology to other companies. It was as high as $47 this year. Now it's $22. SH: Thanks very much for your time. PH: You're welcome. Peter Hodson can be reached at peter@sprott.com.