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The charge of a new bull market

Most of the investing public 'always misses the start of a bull market,' says the lead manager of the North Growth U.S. Equity Fund


Fund manager Rory North sees the U.S. stock market in the early throes of a new bull run.

One sign for him that the market had hit a bottom was Sprott Asset Management Inc.'s splashy Night With the Bears last April in Toronto.

A crowd of 1,500 turned out on a chilly night to hear four bearish gurus, including money manager Eric Sprott, deliver downbeat predictions.

"It is a great contrarian indicator when sentiment is extremely negative," says Mr. North, a 39-year-old manager with Vancouver-based North Growth Management Ltd.

"The vast majority of the investment public always misses the start of a bull market," says the lead manager of the North Growth U.S. Equity Fund since 1999.

"They believe it's just a bear market rally until the pundits calling it a bear market rally are proven wrong."

Time will tell who is right.

Mr. North and his father Rudy, who first launched the $205-million fund at Phillips Hager & North Investment Ltd. in 1992, have an impressive long-term record using their "growth stocks at a reasonable price" philosophy.

North Growth U.S. Equity is the best-performing U.S. equity fund in Canada for the 10 years ended Sept. 30, with a 7.9-per-cent average annualized return.

That compares with a 3.3-per-cent loss for the S&P 500 total return index and 5.6-per-cent loss for the Nasdaq composite index in Canadian dollars.

Over 15 years, the fund, which invests in both big and small companies, is also at the top with a compounded annual return of 11 per cent.

Why are you upbeat?

The last bubble in U.S. equities ended in March, 2000. U.S. equities, in our opinion, were attractively valued in October, 2007, when this last bear market started. To date, we have only taken out about half of the bear market decline. Every other bear market occurred when equities traded at huge premiums or were expensive at high price-to-earnings ratios. In this situation, we've had the second-worst bear market [since the Depression], but we came from a period where equities weren't overvalued.

There are signs the U.S. economy is recovering, but is it sustainable?

Yes, but I think the consumer will not be the engine of growth as it was in the past. I believe that corporate spending and exports will be the key drivers. Capital spending across the globe stopped Sept. 15 last year when Lehman went bankrupt. Going into this - outside of the financials - U.S. companies had never been stronger. One of the key elements to kick-start this economy to more vigorous growth will be the start of a new inventory cycle as companies struggle to meet end demand from current production as well as to try to build inventories back up.

Do you have a target for the S&P 500?

I don't make short-term calls, but Byron Wein, a former Morgan Stanley chief strategist, is one of the more bullish guys out there with a 1,200-target for the S&P 500. Steven Leuthold, chief investment officer at Leuthold Weeden Capital Management, has 1,200 for this year, and 1,350 for 2010. That [1,350] is probably pretty conservative. If the economy starts to accelerate and we get the kinds of earnings growth we think is possible and people start to lose their skepticism, I could see levels higher than 1,400 [from yesterday's close at 1,065 points].

What sectors do you like?

Over 50 per cent of our fund is in technology. When capital spending starts picking up, a growing proportion of capital spending, whether you are building a mine or a call centre, is spent on technology. I think we could have a huge personal computer cycle here. The average age of a PC is up to five years now, and traditionally we have run on a three-year replacement cycle. Our next highest concentration would be in health care at 20 per cent. I believe valuations are being held down because of the health care reform debate. The rest is in consumer cyclicals, consumer durables and capital goods. Only 1.5 per cent is in financials.

Why have you filed a prospectus for new retail fund called North Growth U.S. Equity Advisor Fund?

Rudy retired from PH&N in 1998, but he continued as a shareholder. So long as he remained a shareholder of PH&N, he agreed to not distribute units of the fund [which he took to North Growth Management] widely. Now that all the shares of PH&N have been acquired by the Royal Bank, we can do so.

What advice would you give investors?

Be wary of leverage when it comes to your own personal financial situation, but also when it comes to investing. Don't forget about balance sheets. More importantly, stick to your long-term investing philosophy, and don't let emotions rule your decisions. Outflows from equities went through the roof at the bottom. People ended up selling when they should really be buying. If they were fully invested and sold, they've missed a 50-per-cent rally.


Rory North's stock picks

Cisco Systems Inc. (CSCO-Nasdaq)

The world's largest maker of computer networking gear, which has over $30-billion (U.S.) in cash on its balance sheet, is trading at about 20-times trailing earnings, Mr. North says. Last week, Cisco announced a deal to buy Norwegian video-conferencing company Tandberg for $3-billion. "Their new technologies have tremendous growth potential, and those same technologies drive demand for their [Cisco's] core networking technologies," he says. Its stock closed yesterday at $23.67 (U.S.).

Pier 1 Imports Inc. (PIR-NYSE)

The specialty furniture retailer is still losing money and its stock traded as low as 11 cents a share in March, but there are "tangible signs that the turnaround is intact," Mr. North says. "They have improved their cost structure, closed a number of underperforming stores and rejigged their merchandising. There are indications that sales trends are improving ... Next year, they could have meaningful positive earnings." Its stock closed yesterday at $3.58 (U.S.).

Precision Castparts Corp. (PCP-NYSE)

The maker of complex metal products for the aerospace, power generation and other industrial markets has done a series of acquisitions over 10 years. Recently, they did a $850-million deal to buy Carlton Forged Works, a manufacturer of seamless rolled rings used in aircraft engines. "When they acquire a company, they ... increase their margins, grow the revenues of that company and have generated exceptional returns for their shareholders," Mr. North says. Its stock closed yesterday at $102.14 (U.S.).

© 2007 The Globe and Mail. All rights reserved.

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