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Value fund stacked with resource stocks

swon@globeandmail.com

What are we looking for?

What the pros are buying.

This is our last look this week at stocks on money managers' radar screens. Today, we look at the top 10 equity holdings in Dynamic Value Fund of Canada (dynamic.ca).

More about the fund

The $1.7-billion Canadian focused equity fund has been run since 2003 by David Taylor of Dynamic Funds. It gained 12.6 per cent for the year ended July 31 compared with 11.7-per-cent for the S&P/TSX Total Return Index. The fund has posted an annualized return of 8.3 per cent over five years versus 5.2 per cent for the index.

Mr. Taylor tries to find "under-looked and under-loved value stocks" that have potential catalysts to move them higher. "I am cautiously bullish" in the current weak economic environment, he said. "I think stocks are very cheap in the light of the valuation of the fixed-income environment."

Looking at bond yields or, more specifically, Treasuries, up to five years in the United States, some investors now are willing to accept negative real rates of return [adjusted for inflation], he said. "I don't understand why you would accept a negative return on your investment when you can buy the S&P 500 at 12 times earnings and dividend paying stocks yielding 4 per cent.... "I think there is a chance down the road that rates will have to rise [causing bond prices to fall], and that is going to cause people to take money out of fixed income and put it into equities."

What did we find?

Natural resource stocks dominating the top 10 names.

Mr. Taylor is upbeat on the sector because he expects "significant consolidation." Among those with potential, he highlighted miner HudBay Minerals Inc., which trades at five times cash flow. When you strip out its huge cash on the books, investors won't pay very much for exploration opportunities and pro-active management, he said.

HudBay's new chief executive officer, David Garofalo, was formerly chief financial officer of Agnico-Eagle Mines Ltd. He is going to deploy this cash, and likely do deals that are "very accretive" with smaller-cap names, Mr. Taylor said. He has a one-year target of $20 a share on HudBay.

Kinross Gold Corp., whose stock has been beaten up because of a lack of growth prospects near term, has struck a deal to buy Red Back Mining Inc. The market is concerned the deal is very dilutive, and knocked its stock down even further, he said. Irrespective of whether the merger goes through, Kinross is probably "one of the cheapest gold stocks" and could hit $22 a share in year, he added.

Among non-resource stocks, car parts maker Magna International Inc. is attractive because it has a clean balance sheet and has cut costs significantly, he said.

***

Top 10 holdings of Dynamic Value Fund of Canada at July 31, 2010
Company Symbol Price as of Aug. 25 ($) 52-wk high ($) 52-wk low ($) YTD price chg (%) PE Ratio % Yield Market cap ($ mil.) Volume
Research In MotionRIM-TSX50.79449.64-28.610.5N/A27,935.12,070,598
Kinross GoldK-TSX16.6225.2215.34-14.225.20.611,698.28,420,837
Freeport-McMoRan*FCX-NYSE66.6690.5556.71-17.08.71.828,701.713,396,789
Encana Corp.ECA-TSX28.1536.6527.7-17.512.2320,724.03,649,662
Eldorado GoldELD-TSX20.1320.1710.7434.951.60.310,893.03,403,946
HudBay MineralsHBM-TSX14.13178.054.133.61.42,104.0684,327
Magna InternationalMG.A-TSX81.1886.642.0352.4201.69,099.3284,363
Osisko MiningOSK-TSX14.3156.8869.0N/AN/A4,808.91,161,060
Progress Energy ResourcesPRQ-TSX11.415.299.63-19.4N/A3.52,432.0990,054
Arch Coal*ACI-NYSE21.9828.5216.52-1.238.61.83,571.36,837,442
* in U.S. dollars
Source: Globeinvestor.com

© 2007 The Globe and Mail. All rights reserved.

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