It's tough to be a value-oriented small-cap manager these days. Just ask fund manager Christopher Fernyc, who has had to contend with a dramatic runup in stock prices across the sector.
But any difficulty finding value isn't readily apparent from the recent performance of the Bissett Small Cap Fund, which Mr. Fernyc has managed since June, 2000, for Bissett Investment Management of Calgary. The fund, which has assets of about $708-million, is up 9.73 per cent to date this year.
That follows a strong showing that saw the fund post a 28.55-per-cent gain in the 12 months to Feb. 28, and a 20.3-per-cent gain annualized over three years; 15.36 per cent over five years and 15.35 per cent over 10 years.
After the rally in the small-cap sector over the past five years "there are not a lot of undiscovered gems as it were out there, particularly so in such sectors as mining exploration and energy exploration," Mr. Fernyc said.
The attraction of those sectors was forcefully brought home to Mr. Fernyc on a recent trip to New York. "Everybody and his brother wants to talk about energy."
That same attitude has spread right across the small-cap asset class, he said. "People were just saying I want exposure."
Mr. Fernyc, who takes a buy-and-hold approach to the market, highlighted three stocks that, in his view, offer particular growth potential he feels is not necessarily reflected in their share price.
He has owned shares of Calgary-based Flint Energy Services Ltd. for three years. Flint (FES-TSX) is an integrated, production-oriented service company. He expects the firm's fabricating and welding work for companies involved in the oil sands projects will prove to be "a real gem" in the future. Flint offers a "very interesting way" of getting exposure to the oil sands, he said.
Unlike its peers in the junior oil service sector, Flint's shares haven't surged in the past several years, Mr. Fernyc said, adding that he is impressed with the company's recent appointment of Bill Lingard, formerly of Nabors Canada LP, as chief executive officer. Mr. Lingard is very profit-oriented, Mr. Fernyc said. He thinks Flint could show a profit of $2 to $2.50 this year, which would gives it a price-earnings multiple of about 10 on yesterday's close of $25.88 on the Toronto Stock Exchange. That contrasts with a multiple of 15 or more that much of the sector is trading at, he said.
Mr. Fernyc described another favourite, Axcan Pharma Inc., as "a good, stable, 10-per-cent-a-year growth company." Its drugs are aimed at the gastroenterology market. But there is another side to Mont Saint-Hilaire, Que.-based Axcan (AXP-TSX) that intrigues him -- the heartburn medicine Itax that is undergoing Phase III trials.
"Management believes this drug has the ability to double the revenue of the company at a minimum," Mr. Fernyc said. Approval of the drug, if it comes, is several years off, he said, and he assigned no value to Itax. Axcan shares, which closed up 2 cents at $20.92 on the Toronto Stock Exchange yesterday, are quite reasonably priced and carry the possibility of "pretty decent upside," he said.
The fund has held shares for at least six years in Aastra Technologies Ltd. (AAH-TSX), a Toronto company that provides business-oriented telecom equipment. Like Axcan, Aastra uses its "very, very strong profitability and cash flow" to acquire non-core businesses from other companies in its sector, he said.
Aastra generates between $2 and $2.50 a share of free cash flow a year and has used that cash flow to build a "tremendously strong balance sheet" that had about $129-million on it at the end of 2004, he said. Aastra recently completed the takeover of a telecom division of EADS Group in Europe that will make Aastra the No. 2 or 3 player in the European business telephone systems market, he said.
Mr. Fernyc expects Aastra's management will achieve significant cost savings with this takeover, as it has with previous acquisitions. Aastra shares closed unchanged yesterday at $20.40 on the Toronto Stock Exchange.
Bissett Small Cap Fund
Top 10 holdings to Feb. 28
|2.||Calfrac Well Servicing||4.7|
|6.||Flint Energy Services||3.9|
|10.||Home Capital Group||3.8|
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