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More smaller-cap finds at bargain prices

swon@globeandmail.com

WHAT ARE WE LOOKING FOR?

What the pros are buying. This is our second glimpse this week at smaller-company stocks that tend to spring to life in the early stages of an economic recovery.

Today, we'll look at Empire Small Cap Equity. You can check its holdings at the Empire Life website at www.empire.ca/consumer/en/investment/index.html

ABOUT THE FUND

The $370-million Canadian small-to-mid-cap equity fund has been managed for Empire Life since 2003 by Scott Morrison, who is also chief investment officer of Wealhouse Capital Management.

The Class A version gained 60.1 per cent for the year ended Jan. 31 versus 68.7 per cent for the BMO Nesbitt Small Cap index. The fund has posted an average annual return of 5.6 per cent over five years, and 11.4 per cent over 10 years.

Mr. Morrison looks for growth-oriented companies trading at cheap prices. "We are very bullish on small- and mid-caps right now," he said. "We are finding lots of opportunities in the technology, industrial and consumer discretionary industries. ...Typically, small-cap cycles have a tendency, when you study history, to go in five- to seven-year stretches."

Smaller companies are benefiting from access to credit in a low-rate environment to finance growth, he said. "It's the old adage that it takes money to make money."

WHAT DID WE FIND?

An eclectic mix of names that have already made huge gains from 52-weeks lows.

Still, Mr. Morrison still sees upside in names like Chartwell Seniors Housing Real Estate Investment Trust, a Mississauga-based retirement residence operator that trades at 12 times funds from operations and has a 7-per-cent yield.

"I am very bullish on the demographic potential for the retirement business," he said. "We like the management changes. ...They brought in a more conservative management team. The previous team was much more aggressive in trying to develop new assets and taking on more debt. The new team is more focused on operating the assets as well as they can, and improving the profitability of those assets."

Top holdings include Ag Growth International Inc., a Winnipeg-based manufacturer of grain handling, storage and conditioning equipment. The firm should benefit from an economic recovery, Mr. Morrison said. "It is very profitable, and also has a very strong management team."

Its stock is cheap, trading at about nine times next year's earnings, and provides a 5.5-per-cent dividend yield, he said. "And it also has a very low level of debt."

He also likes Burlington, Ont.-based Evertz Technologies Ltd., a maker of radio and telecommunications equipment. "We like management teams that own lot of their stock, and about 60 per cent is still owned by two of the founders," he said. "Evertz also has a clean balance sheet."

Evertz trades at about 13 times forward earnings, but those earnings are "somewhat depressed" because they are tied to the advertising industry, he said. "As the advertising cycle recovers in the next couple of years, broadcasters will be in a position to allocate more money to improving their broadcast equipment," he said.

*****

Top holdings for Empire Small Cap Equity to Jan. 31.
52-Week52-WeekYTDMarket
PriceHighLowprice chgeYieldPE RatioCapVolume
CompanySymbol($ Daily)($ Daily)($ Daily)(%) (Daily)(Daily)($ mlns)(Daily)
Ag Growth InternationalAFN-T36.8938.516.956.015.510.8475.1318,431
Gluskin Sheff + AssociatesGS-T19.9522.57.49-2.922.515.6583.2820,764
Major Drilling GroupMDI-T26.6730.6610-7.31.5n/a632.6188,046
Chartwell Srs Housing REITCSH.UN-T7.548.033.637.257.2n/a740.99111,595
Churchill Corp.CUQ-T2121.476.268.9809.7369.5937,087
Canadian Western BankCWB-T20.33247.52-7.342.213.51,299.1645,080
Evertz TechnologiesET-T15.0217.321011.262.113.81,100.3728,731
WestJet AirlinesWJA-T14.0614.159.6313.480192,029.69358,436
Winpak Ltd.WPK-T8.659.775.8-2.591.412.5562.258,930
Canadian HelicoptersCHL.UN-T10.8611.375.85-1.2710.16112.219,310
Source: Globe Investor, company

© 2007 The Globe and Mail. All rights reserved.

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