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Manager plays energy with a difference

Feels services firms have pricing power

INVESTMENT REPORTER

Fund manager Christine Décarie is playing the boom in the energy sector in a different way than many managers. She is going for shares of the energy service companies, rather than the big integrated or exploration and development firms.

"I actually tend to think it is an interesting way to play the energy sector," said the Montreal-based manager at Investors Group Inc. "If we were to see oil prices go down from the $70 [U.S. a barrel] it is now, to, let's say, $50 . . . the oil companies would see a significant correction in their stock," she said. The oil service companies might react in sympathy initially, "but frankly, $50 oil is still a good price and oil companies are going to continue to invest to grow production because it is still profitable to do so at that point."

Besides, she said, the oil service companies have pricing power.

Ms. Décarie has been running the Investors Mutual of Canada Fund since January, 2000. The $2.5-billion (Canadian) balanced fund is up 0.52 per cent so far this year. It had a return of 15.06 per cent in the 12 months ended April 30 and 12.47 per cent annualized over the last three years. It has returned 8.88 per cent annually since its inception in January, 1950.

She is also drawn to the industrial sector, with late-cycle businesses such as engineering and construction, non-residential construction, rail and commercial aerospace. Capital investment projects were pared back at the end of the nineties and "capacity utilization figures for the U.S. as a whole are starting to bump up above the level of 80 per cent," she said.

One such stock she likes is Honeywell International Inc. (HON-NYSE). About 40 per cent of the Morris Township, N.J., firm's revenue comes from commercial aerospace, and the rest is split between non-residential construction and automation and control. It has had a checkered past but new management took over almost four years ago. "They have done a tremendous job," she said.

Honeywell's profit is expected to grow 15 to 20 per cent a year over the next two to three years, which is stronger than its peer group, she said. It has a strong balance sheet with a very low net-debt-to-capitalization ratio. And a $3-billion (U.S.) share buyback is under way. Yet the stock trades at about a 10-per-cent discount to its peer group based on estimated 2007 share profit. Honeywell shares set a 52-week high of $44.48 on April 18, up significantly from the 52-week low of $32.68 established on Oct. 21, but they have since eased back and now stand at $39.80 on the New York Stock Exchange.

Precision Drilling Trust (PD.UN-TSX) fits in with her preference for the service companies in the energy sector. The "outlook for the service sector is the best we have seen in years," she said. The oil companies are generating significant cash and reinvesting it to boost production, and that is putting pressure on day rates and rig availability. Capital spending in the energy sector is forecast to grow 24 per cent worldwide this year, she said.

Precision Drilling is a "pure play" on drilling in Canada, and the number of wells being drilled there this year is expected to rise by mid-single digits, she added. The Calgary-based company sold its international operations last year before converting into an income trust last November. The units, which closed yesterday at $37.52 (Canadian) on the Toronto Stock Exchange, yield 9.79 per cent so they offer a high yield, pricing power and profit growth, she said. The units have climbed since the conversion but have fallen back since setting a high of $43.40 on April 26.

Canam Group Inc. (CAM.A-TSX), based in Saint-Georges de Beauce, Que., is a maker of construction products that has refocused on its core operations in the last few years. It is now the leading steel joists manufacturer in Canada with a 77-per-cent market share here and an 11-per-cent share in the U.S. It has also focused on profitability and debt reduction and has eliminated its multiple classes of shares Ms. Décarie said.

And Canam is looking to adjusting its product line to make the company less cyclical, she said. Furthermore, Canam has de-leveraged its balance sheet in the past year, with a $43-million share issue, forced conversion of its convertible debenture and the sale of non-core assets. Canam shares closed yesterday at $10.70 on the Toronto Stock Exchange.

*****

A fine balance

Christine Décarie has been running the Investors Mutual of Canada Fund since January, 2000. The $2.5-billion balanced fund has returned 8.88 per cent annually since its inception in January, 1950.

Investors Mutual of Canada-C Fund

CATEGORYCANADIAN BALANCED
TOTAL ASSETS$2.5-BILLION
FUND TYPEOPEN-ENDED
MANAGEMENT EXPENSE RATIO2.92%
SALES FEE TYPEBACK END
GLOBEFUND 5-STAR RATING SYSTEM***
INCEPTION DATEJanuary, 1950

Returns to April 30, 2006

1-YEAR SIMPLE RATE OF RETURN15.06%
3-YEAR COMPOUND ANNUAL12.47
5-YEAR COMPOUND ANNUAL5.33
10-YEAR COMPOUND ANNUAL7.77
15-YEAR COMPOUND ANNUAL8.67
20-YEAR COMPOUND ANNUAL8.26

Top 10 holdings as of April 28, 2006

1ROYAL BANK OF CANADA
2SUNCOR ENERGY
3TORONTO-DOMINION BANK
4GOVERNMENT OF CANADA 5.75% JUNE/01/29
5SUN LIFE FINANCIAL
7BANK OF NOVA SCOTIA
8ALCAN
9TALISMAN ENERGY
10MANULIFE FINANCIAL

SOURCE: GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

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