The only way to go

Duncan Stewart, manager of Navigator Canadian Technology fund, is not shy about expressing his view on technology stocks. "In Canada," he says, "if you're not in technology, you're nowhere." Duncan made 126% for his investors in 1999 by investing in Canadian technology, but he says there is much more to it than that.

"Most Canadian money managers have always been great at resource stock picking," he says, "because that is what Canada's market has been revolving around historically. They are the best in the world for gold, oil and gas." But the market landscape is changing. "Not many Canadian equity funds beat the TSE this year," he says. "The ones who did, like Ian Ainsworth of Altamira Equity, understand and embrace technology stocks." Famed investment guru Warren Buffett recently said that the U.S. market is expensive because it's hard to imagine that the stock market will be able to grow faster than the world economies, which are growing at 3-5% per year. Duncan agrees, adding, "I buy the tech sector because these companies are the only ones growing faster than the global economy."

Duncan is proud to have made his returns on stocks that he bought cheap when nobody knew them. "I'm a value investor and I love cheap stocks," he says. "I normally expect to outperform when the market is down," he explains, "but it was great to have so much success in a bull market as well this year." His track record goes back for years to substantiate his statement, as his portfolios have almost always outperformed when the market is down, doing 2.5% better on the average than the rest of the market. He picks undervalued stocks after doing extensive evaluation of the science behind the company's products and after examining the competitive landscape and meeting with the company's management. He constantly re-evaluates his positions and he's not afraid to admit it when he makes a mistake. With 70 names in his portfolio, he spends more than 10 hours a day researching, learning and visiting with his companies just to stay on top of the situation and avoid risk.

"Canadians are scared about risk in the tech sector," Duncan says. He agrees that investing in an individual high tech stock is probably riskier than investing in another stock but Duncan maintains that the real risk is in missing out on the technology boom. "Real risk is looking for oil in the ground," he says. "With tech companies, we can do our homework, complete due diligence, and we see that most of the companies are in high growth, high profit margin areas." Lots of money and quick growth is the norm for technology, software, hardware and biotech companies. "Why would anyone want to buy Coca Cola or Loblaw when the tech sector is growing at 25-40% or more?" he says.

Duncan mitigates risk in his portfolio by owning both expensive and cheap stocks, by spreading the holdings across small, mid and large caps, and by constantly evaluating his positions and shifting into profitable sectors.

Duncan shares a few of his favourite picks with us. Among the large caps, Duncan still likes JDS Uniphase. "It can go substantially higher, to $450 (Cdn)," he says, "and I said that back when the stock was trading at $80." Looks like it was a good call, as the stock now trades for around $282 with considerable upside potential. "The company is dominant within its industry," Duncan says, "it is the Microsoft of fiber optics, and it makes the Internet run faster."

Since Duncan likes the biotech sector, we asked about his favourite, Stressgen. Simply said, the company makes drugs to cure cancer. Duncan could go into a four-hour explanation of the technical details but that simple phrase says a lot. "This company is waiting to be discovered," he says. "Everyone knows they need money in order to reach the next level." Duncan says the company will be raising that money in the near term and then he expects the stock to shoot up to $6 or $7 per share.

His favourite small cap is Digital Processing Systems, a company that makes hardware and software for TV animation studios. "It's a good market to be in and it's lots of fun," he says. Duncan believes the company will make 40 cents per share this year, which would mean it trades at less than 9 times earnings. "This company is growing faster than the industry," he says, "which is already trading at 30 times earnings."

Levi Folk, Richard Webb and Peter Diplaros are Investment.com mutual fund specialists and editors of the Fund Counsel newsletter. They can be reached by e-mail at peterd@hqinvestment.com.