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Biggest opportunity, best value may lie in smallest-cap companies

Micro-caps may be the place to be as small caps are fully valued: manager


Canadian small-capitalization stocks have had a good run in recent years and so now they are close to fully valued, according to fund manager Robert Tattersall.

Mr. Tattersall, who writes a column for, manages several funds including the CIBC Canadian Emerging Company Fund. He has been running the CIBC fund, which has assets of $49-million, since October, 1998. It is up 1.42 per cent so far in 2005. It advanced 2.57 per cent in the 12 months to Feb. 28 and 13.38 per cent annualized over three years and 9.83 per cent over five years.

"Small caps are still about 10 to 15 per cent cheaper than their big-cap counterparts if you look at price-to-book or price-to-sales; but they are at about a 10-per-cent premium valuation if you look at P/E [price-earnings] ratios," said the executive vice-president of Howson Tattersall Investment Counsel Ltd. But that still leaves "scope for continued consolidation, takeover and income trust conversion."

The hottest group within the small-cap sector up until the past few weeks has been the energy issues. After talking with executives of small-cap oil and gas and energy service sector firms in Calgary recently, Mr. Tattersall says he thinks "investors may be underestimating the supply side response" to crude oil prices in the $50 (U.S.) range.

Given the gains in small-cap issues generally in recent years, Mr. Tattersall says "if you want real value these days, you have to go way, way down into the micro-caps."

His four stock picks all fit into that category. Circa Enterprises Inc. (CTO-TSX) is a Calgary-based firm that supplies technical products such as surge protectors and utility pole hardware to the telecom industry. Circa has a market cap of about $10.9-million and had revenue of about $22-million last year. The shares closed yesterday at $1.16 on the Toronto Stock Exchange. That is slightly above the book value per share of $1.03 and about 10 times cash flow, Mr. Tattersall said. And cash flow is growing because the company is getting significant new orders, he added.

Dynetek Industries Ltd. (DNK-TSX) is bigger than Circa at a market cap of about $42-million. Like Circa, Dynetek shares trade at a slight premium to book value of $1.93 a share. They are currently changing hands at about $2.10. The stock "is not cheap" on a price-to-sales basis as revenue is about $26-million, but the product the firm makes is "quite exciting," Mr. Tattersall said. Calgary-based Dynetek makes high-pressure tanks for storing compressed natural gas for bus fleets and for storing compressed hydrogen for hydrogen fuel-cell vehicles. "So this is I think a very attractive company because they have a good bread-and-butter business."

International Road Dynamics Inc. (IRD-TSX), which is headquartered in Saskatoon, provides a variety of road traffic management devices, including in-road sensors, vehicle weighing devices, radar speed displays and toll road systems. Mr. Tattersall says the company's electronic monitoring devices have a "huge potential application" for U.S. Homeland Security purposes. International Road Dynamics has about a $12-million market cap and at yesterday's close of 88 cents, the shares trade slightly below book value of 93 cents. It had sales of about $31-million last year.

Spectra Premium Industries Inc. (SPD.SV-TSX) is a "classic Old Economy company," Mr. Tattersall said. It primarily makes replacement radiators and fuel tanks for cars. The Boucherville, Que., firm is in a "less glamorous" but "maybe somewhat more profitable" niche in the industry, he said. Spectra's subordinate voting shares closed yesterday at $2, about a third of its $6.08 book value; so it is "clearly a company that is out of favour."

Micro manager

Because small-cap stocks have had a good run, fund manager Robert Tattersall is now looking for value in the micro-cap market.

CIBC Canadian Emerging Co.

CategoryCdn. small capitalization
ManagerCIBC Securities Inc.
Load statusOpen-ended
Total assets$49.11-million
Management expense ratio2.14%
Globefund 5-star rating system****

Returns to Feb. 28, 2005

1-year simple rate of return: 2.6%

3-year compound annual: 13.4%

5-year compound annual: 9.8%

Top ten holdings, As of Feb. 28, 2005

1.Total Energy Service3.25%
2. Thunder Energy2.81
3.CCL Industries2.65
4.Aur Resources2.50
5.Charming Shoppes2.47
6.Forzani Group2.43
7.Sherritt International2.40
8.Kingsway Financial Services2.39
9.Aastra Technologies2.37
10.Canfor Corp.2.28


© 2007 The Globe and Mail. All rights reserved.

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