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Manager likes look of smaller techs

McWhirter uses quantitative model in picking his stocks

INVESTMENT REPORTER

Fund manager Robert McWhirter is having trouble finding large-capitalization Canadian technology stocks to buy, but the same is not true with the smaller tech issues.

Mr. McWhirter has been running the Northwest Specialty Innovations Fund since its inception in November, 2000. That was just as the market's love affair with tech stocks was cooling. The $40.5-million fund has a return of 22.58 per cent annualized over the past three years to the end of June. The one-year return is basically break-even and year to date, the fund is down 0.97 per cent.

Mr. McWhirter, president of Selective Asset Management Inc., which manages about $45-million in assets, uses a 12-point quantitative model in choosing his stock picks. The model includes factors such as profit momentum, earnings surprises, price-to-sales and price/earnings multiples and return on equity. And it is on factors like that that the large-cap tech stocks are found wanting.

"Most of the large-cap tech stocks don't rank in the top one-third of the database" constructed using the model, he said. "Canadian tech stocks on a weighted basis are expensive on a price-earnings multiple basis versus the TSX [composite]," he said. The 17-member tech group has a P/E that is about 50 per cent higher than that of the composite.

Moreover, "investors have high expectations for tech earnings growth in 2005; analysts are forecasting 78-per-cent earnings growth," he said. "But the fundamentals don't appear to justify this optimism." For one thing, sales for the TSX composite companies as a group in the most recently reported quarter were up 9 per cent from a year earlier. The equivalent figure for the tech group was just 3 per cent. In addition, profit estimates for the typical TSX tech stock have been cut by 11 per cent over the past 90 days, whereas the estimate for the TSX composite has edged up 0.6 per cent, he noted.

Measured on those parameters, his three stock picks stack up quite well. Two of the three -- Bombardier Inc. and CAE Inc. -- are not your conventional tech stocks. Both stand to benefit from the pickup in aircraft sales, Mr. McWhirter said. The pickup is shown, for example, by the fact that Boeing Co. received orders for 441 aircraft in the first six months of this year, which is well above the 277 orders for all last year. If the price of oil were to fall, that would be an added plus for those companies' customers, he said.

Bombardier (BBD.SV.B-TSX), which operates through three main divisions -- aerospace, commuter and regional trains, and finance-- gets high marks from the model for its quarterly profit momentum and its year-over-year profit growth. The substantial year-over-year increase in EBITDA (earnings before interest, taxes, depreciation and amortization) also weighed heavily in the stock's favour. Consensus has Bombardier earning 14 cents (U.S.) a share in the year ending January, 2006, a sharp improvement over last year, and then rising further to 21 cents in the fiscal year ending January, 2007. Its shares closed yesterday at $2.84 (Canadian) on the Toronto Stock Exchange.

CAE, (CAE-TSX), which provides flight simulators and training services for commercial airlines and defence customers, scored highly in terms of EBITDA growth among other factors. Also, analysts have been boosting their estimates for CAE over the past three months, he noted. The company is expected to show a profit of 27 cents a share in the year ending March, 2006, up from 19 cents a share before non-recurring items last year. A further increase to 38 cents is forecast for the following year. CAE shares are changing hands at $6.67.

Mr. McWhirter's third stock pick is Matrikon Inc. (MTK-TSX). The Edmonton-based engineering and consulting firm specializes in Web-based products and solutions for manufacturing industries. He is particularly drawn to Matrikon's oil well optimization software. A number of companies are already using it, he noted. "In my view, regardless of whether the price of oil is $40 [U.S.] a barrel or $60 a barrel, when someone comes to you and says you can end up increasing the production of that well by 5 to 7 per cent, the cost benefit . . . is extremely attractive," he said.

Matrikon shares, which also scored well on the model, closed yesterday at $4.56 (Canadian).

High fliers?

Two of the three stocks that Northwest Specialty Innovations Fund manager Robert McWhirter has picked in Best Bets have an aviation bent. Bombardier Inc. and CAE Inc. both stand to benefit from a pickup in aircraft sales.

Northwest Specialty Innovations Fund

CATEGORYScience and Technology
MANAGERRobert McWhirter
LOAD STATUSOpen-ended
TOTAL ASSETS$40.48-million
MANAGEMENT EXPENSE RATIO2.88%
GLOBEFUND 5-STAR RATING SYSTEM****

Returns to June 30, 2005

6-month compound annual return-1.06%
1-year compound annual -0.44%
3-year compound annual22.58%

Top 10 holdings, as of May 31,2005

1.Trican Well Service 3.65%
2.Geac Computer Corporation 3.15%
3.CryptoLogic 3.14%
4.MKS Inc. 3.06%
5.Ceramic Protection 3.05%
6.Great Canadian Gaming 3.02%
7.Telus2.95%
8.Cognos Inc. 2.95%
9.Mosaid Technologies 2.89%
10.Matrikon Inc. 2.66%

SOURCE: GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

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