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Commodities as inflation hedge

Material sector could stay hot even as North American markets cool down

INVESTMENT REPORTER

Fund manager Paul Mesburis is bullish on material stocks, a sector a number of managers are shying away from at the moment. He also likes technology and industrial issues.

Mr. Mesburis, who took over management of the Mavrix Sierra Equity Fund in January, 2006, believes that the materials sector "will continue to do well over the next three to five years" as inflation has become a concern again. So he expects investors will be drawn to the commodity stocks not only for fundamental reasons but also as hedges against inflation.

Underlining his bullishness on the materials sector is his belief that the economic downturn in Canada and the United States will be mild because "there is still going to be strong growth outside of the developed countries."

He finds technology issues attractive because of their valuations and the fact that corporate profits are quite strong.

Mr. Mesburis, a vice-president and associate portfolio manager at Mavrix Fund Management Inc., also favours industrial issues, particularly those related to construction and infrastructure.

Agriculture, another sector he expects will continue to do well, can be played through commodity stocks such as Agrium Inc. and Potash Corp. of Saskatchewan Inc. or through issues such as AG Growth Income Fund, he noted.

He has significantly underweighted U.S. financials in the fund. "I would avoid U.S. financials probably at least for another quarter or so to see how this subprime mess sorts itself out and what sort of solution might come of it."

The $9.5-million Mavrix Sierra Equity fund had a return of 33.52 per cent in the 12 months ended Oct. 31, 24.75 per cent annualized over the past three years and 20.99 per cent over the past five years.

Paul Mesburis's top picks

Timminco Ltd.

(TIM-TSX)

Yesterday's close $15.06, up 73¢

Mr. Mesburis has owned

Timminco Ltd. (TIM-TSX) since the spring, when the shares of the Toronto-based supplier of high-purity silicon were trading at around $3. He thinks they could go much higher than their current price over the next year. He noted that demand for solar silicon remains strong. The facility in Bécancour, Que., that Timminco is building is expected to start producing by the end of this year and reach full capacity by the beginning of the third quarter next year. He expects Timminco will almost triple its output to 11,000 tonnes a year by 2010.

ProMetic Life Sciences

(PLI-TSX)

Yesterday's close 55¢, down 3¢

Mr. Mesburis likes

ProMetic Life Sciences Inc. (PLI-TSX), which is developing a drug (PBI-1402) for the treatment of anemia. He anticipates that the drug will be commercially available by 2009.

Among the things that could boost the stock are its presentation of Phase 2 results at the American Society of Hematology on Sunday, Phase 2 clinical results for other amenia indications or the announcement partnerships,

He also noted the market for all anemia treatment drugs is valued at $8-billion (U.S.) and is forecast to increase to $15-billion by 2015.

Absolute Software

(ABT-TSX)

Yesterday's close $35.01, down $2.22

Absolute Software Corp. (ABT-TSX) offers anti-theft and data protection services for computers. If a laptop equipped with Absolute's proprietary software is stolen, it can be retrieved by tracking it the next time it is plugged into the Internet, Mr. Mesburis said. He notes that the Vancouver-based firm has established relationships with a number of major laptop manufacturers and that the market for anti-theft and data protection is in its infancy. He also believes that Absolute would be an attractive takeover target, but adds that his investment thesis is not predicated on that taking place.

© 2007 The Globe and Mail. All rights reserved.

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