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Microcap growth at a reasonable price

swon@globeandmail.com

WHAT ARE WE LOOKING FOR?

What the pros are buying. This is our last look this week at smaller company stocks that tend to do well in the early stage of an economic rebound. These stocks got crushed during the 2008 market meltdown amid the global credit crunch.

Today, we look at Bissett Microcap Fund. You can check out the top holdings at http://www.franklintempleton.ca for the fund under fund facts.

ABOUT THE FUND

This Canadian small-to-mid cap equity fund has been run since late 2007 by Ralph Lindenblatt of Bissett Investment Management, a unit of Franklin Templeton Investments Corp. It currently manages $58-million in assets.

The manager, who looks for growth stocks trading at reasonable prices, defines micro-cap stocks as those with a market value of less than $300-million. The top 10 holdings represent more than 50 per cent of the fund.

The A series gained 61.1 per cent for the year ended Jan. 31 versus 68.7 per cent for the BMO Canadian Small Cap Index (which has a larger weighting in resource stocks than the Bissett fund). Over five years, the fund has an average annual return of 2.3 per cent.

The micro-cap stocks got hit the hardest in the smaller-company universe during the bear market in 2008 and early 2009, he said. Unlike last year when the recovery in micro-cap stocks were led mainly by cyclical stocks, "I think the market is now looking more for higher-quality stocks," said Mr. Lindenblatt.

"Given the fact that the economic outlook is still uncertain ... companies with above-average profitability, strong balance sheets and good management are the ones that are probably going to shine over the next year or two."

WHAT DID WE FIND?

A wide range of industry sectors - from a specialty paper maker and oilfield services company to a mortgage lender.

Fortress Paper Ltd., which has mills in Germany and Switzerland, makes security (such as currency notes) and specialty papers as well as wallpaper.

"It definitely has above-average profitability compared to other businesses that operate in the pulp-and-paper segment," Mr. Lindenblatt said.

"They have a proven management team, a self-sustaining business plan, strong balance sheet and opportunities to grow the business."

The stock is "very attractively valued," trading at 11 times trailing earnings, he added.

Another top holding is Canyon Services Group Inc., a oilfield services company that provides specialized fracturing and well stimulation services.

While it should post a significant an operating loss in 2009, the outlook is looking better, while Canyon could also be a potential takeover target, he suggested. "We think it should be nicely profitable this year and 2011."

Equitable Group Inc., a mortgage lender that operates through brokers in Ontario and Alberta also has upside, he said. "It has a very conservative management team and a very strict underwriting philosophy. The overall losses in recent years has been manageable, and we think that credit quality will improve going forward."

***

Top holdings for Bissett Microcap Fund to Jan. 31.
52 Week52 WeekYTDPEMarket
PriceHighLowprice chgeYieldRatioCapVolume
CompanySymbol(Daily) (Daily)(Daily) (%) (Daily) (Daily)($ millions)(Daily)
Horizon North LogisticsHNL-T1.71.830.553.030n/a187.6832,300
Indigo Books & MusicIDG-T16.217.2510.512.862.510.9397.5062,269
Contrans GroupCSS-T7.58.92.987.14012.9178.497,726
Le ChateauCTU.A-T12.714.526.6-6.965.59.8309.812,540
Equitable GroupETC-T20.522.649.11-3.5327305.2310,339
Canyon Services GroupFRC-T440.9170.210n/a88.601,700
Fortress PaperFTP-T13.3513.884.6240.53010.8136.624,771
Pure Energy ServicesPSV-T2.82.950.9732.080n/a66.4716,592
ZCL CompositesZCL-T3.9653.1218.21323.3105.123,901
Sun-Rype ProductsSRF-T8.819.796.011.15022.695.391,690
Source: Globe Investor, company

© 2007 The Globe and Mail. All rights reserved.

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