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Manager sees little further gain for index

PIERRE TROTTIER'S forecast for S&P/TSX partly derived from prediction for oils

INVESTMENT REPORTER

Fund manager Pierre Trottier expects the S&P/TSX composite index will end the year somewhere between 7,500 and 8,000 points, which suggests that Bay Street's benchmark index may have already seen most, if not all, of its gain for the year.

The S&P/TSX composite closed yesterday at 7,843.47.

At the beginning of 2003, Mr. Trottier, vice-president of equities for Montreal-based Optimum Asset Management Inc., set 7,500 as his target for the year, which would have given the Toronto market a 15-per-cent return, including dividends. Since then, profits have improved significantly and interest rates have remained low, tipping the scales in favour of stocks over bonds. Sentiment has also changed.

"Last year, nobody wanted to own stocks," he said. Since that time, investors have regained their confidence in the market.

"I think we might go up until 8,000, but that would be . . . the maximum I would see for this year." He has a target of 8,500 for the end of next year.

Mr. Trottier expects energy issues will see some selling, as the Organization of Petroleum Exporting Countries tries to maintain its market share in the face of production from non-OPEC countries and as output from Iraq continues to rise over the next couple of quarters.

He also feels the industrial products sector could come under pressure because of the stronger dollar. Mr. Trottier said he wouldn't be surprised if the Canadian currency climbs to 80 cents (U.S.). It is currently at 75.02 cents (U.S.).

Mr. Trottier manages the Optimum Stock Fund and the Batirente Canadian Equity Fund. The Optimum Stock Fund has gained 19.27 per cent so far this year.

He has bought or added to the following stocks recently:

Alcan Inc. (AL-TSX). Mr. Trottier added to his position in the Montreal-based aluminum producer earlier this year when its shares were trading at just less than $40. Alcan usually trades at one to two times its book value but wasn't at the time he bought the shares. Experience over the past 20 years shows that any time Alcan's stock price falls below its book value, that is usually a "good entry point," he said. He added that he would still buy Alcan shares at their current levels because of the planned purchase of its French competitor, Pechiney SA. Mr. Trottier has a 12-month price target of $75 on Alcan. The shares closed yesterday on the Toronto Stock Exchange at $53.40, down from their 52-week high of $56.43 but remain well above the 52-week low of $38.77.

Sun Life Financial Inc. (SLF-TSX). Mr. Trottier has bought additional shares in the Toronto-based life insurance and financial services company on several occasions this year. The most recent purchases were at $27.95 a share in late July. At that price, the shares weren't that far above book value. He expects Sun Life's return on equity to improve over the next few quarters, which, he said, should allow the stock to command a higher price-to-book ratio. He noted that the life insurer's capital position is very strong by industry standards, which suggests that the company could increase its dividend over the next couple of years and/or do additional share buybacks.

Sun Life ended yesterday's session at $33.40, a 52-week high. The 52-week low is $24.75.Teck Cominco Ltd. (TEK.B-TSX). Mr. Trottier increased his stake in this Vancouver-based mining firm in August, with purchases of B shares at $12.50 each. The price of zinc has only recently begun to recover after a more than two-year bear market. The price stands about 41 cents (U.S.) a pound, up from a low of 35 cents at which few producers were making money. He noted that China has reduced its output and now is an importer of zinc concentrate. China has also cut its exports of refined zinc.

Teck Cominco's stock price has risen along with the price of zinc, and Mr. Trottier expects it to reach $22 (Canadian) a share in 12 month if, as anticipated, the price goes to 55 cents (U.S.) a pound next year. The 52-week high is $17.58 (Canadian), and the stock closed yesterday at $17.34. The 52-week low is $10.10.

Rona Inc. (RON-TSX). Shares of the Boucherville, Que.-based hardware and home improvement retailer came under some pressure in August, at which time and Mr. Trottier added to his position. Since then, Rona has received approval from the federal Competition Bureau to complete the acquisition of Réno-Dépôt Inc., which removes a big competitor in the Quebec and Ontario markets. Rona also plans to open a new distribution centre in Calgary in the first quarter of next year and it is adding some big-box stores in the West, he noted. He thinks the company may acquire some smaller players in that region.

He anticipates that the stock will soon be added to the S&P/TSX composite index, which will increase its following. He has a 12-month price target of $28 on the shares, which closed yesterday at $24.52. The 52-week high is $24.95, the 52-week low $11.75.

© 2007 The Globe and Mail. All rights reserved.

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