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Search for 'quality' turns up eclectic mix

What are we looking for?

Stocks coveted by portfolio managers.

Investors can check out a fund's top holdings on the company's website. Today, we look at Montrusco Bolton Investments Inc.'s Canadian Small Cap fund at

More about the fund

The $489.7-million Canadian small- to mid-cap equity pooled fund has been run by manager Christian Godin since 2006. (He started on the portfolio as an assistant portfolio manager in early 2005.)

The fund gained 53.3 per cent for the year ended May 31 compared with 43.4 per cent for the BMO Nesbitt Burns Canadian Small Cap Index. Over five years, the fund has posted an average annual return of 9.7 per cent versus 6.9 per cent for the index.

Mr. Godin tries to buy "quality businesses" for the long term. He looks at an industry's dynamics to see whether a company has a competitive edge, and can be described as "best in class." Other criteria include financial strength, proven track record as an operating company and strong management.

"As long as we are not in a credit-tightening environment, our view is that small caps will outperform large caps," he said. "When the monetary policy is restrictive, smaller businesses' access to capital is diminished and, therefore, they don't have the same ability to realize their growth projects."

While the Bank of Canada has raised its key lending rate by 25 basis points to 0.5 per cent, "we believe that the U.S. Federal Reserve Board will not start to tighten the system in 2010," he added. "That's why we think small caps will outperform large caps."

What did we find?

An eclectic mix of names.

Among the top holdings is Crew Energy Inc., an oil and gas company. "I like the growth profile" from its Montney gas and Princess oil plays, Mr. Godin said. He also likes the fact Crew's revenue derived from oil will rise to 45 per cent by year end from 35 per cent last year because he is more bullish on that commodity than gas.

"Crew has a clean balance sheet with lower debt than the average oil and gas play," he said. "We like management. They were early in identifying the potential of both the Princess and Montney plays." His 12-month target price is $25 a share.

Mr. Godin is upbeat on alternative lender Home Capital Group, It has benefited from some rival U.S. financial players leaving its space after the financial crisis of 2007-08, he said. "Home Capital [which targets entrepreneurs and immigrants who can't borrow easily from a bank] is taking market share, and growing." The firm "grew its earnings and revenue during the economic slowdown and maintained a double-digit return on equity," he added. His 12-month target is $55 a share.

He also likes gold miner Alamos Gold Inc., a low-cost producer with most assets in Mexico, and also projects in Turkey. "Their mines [in Mexico] started only four years ago, but have been highly profitable over the last two or three years," he said. "Alamos has high profit margins, free cash flow, no debt and nearly $200-million of cash on the balance sheet." His 12-month target is $21 a share.

Top 10 holdings for Montrusco Bolton Canadian Small Cap at May 31, 2010
Company nameSymbol$ Price June 1452-wk high $52-wk low $YTD % price chgP/E% YieldMarket cap ($-mil)Volume
BMTC GroupGBT.A-T17.8320.649.5018.97.01.1463.63,005
Home Capital GroupHCG-T41.9048.5527.580.110.01.51,454.555,784
Legacy Oil + GasLEG-T12.7913.700.4033.,356,460
TransGlobe EnergyTGL-T8.188.252.60133.,393
Allied Nevada GoldANV-T19.6223.298.5923.60.00.01,439.1157,168
SXC Health SolutionsSXC-T74.4278.6926.5629.937.80.02,256.337,224
North West Co. FundNWF.UN-T19.5520.2214.882.911.47.0945.844,451
WaterFurnace Renew. En.WFI-T27.2532.1523.955.021.33.3329.5607
Alamos GoldAGI-T15.5016.108.5323.427.70.41,771.4395,804
Crew Energy IncCR-T17.5419.144.1119.50.00.01,393.0349,320
Source: Globe Investor, company

© 2007 The Globe and Mail. All rights reserved.

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