David Pearce, 67
Semi-retired lecturer in finance and economics
Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Freehold Royalty Trust, Dundee REIT, Reitmans (Canada) Ltd., Keg Royalties Income Fund, Boston Pizza Royalties Income Fund, A&W Revenue Royalties Income Fund
David Pearce is well-qualified to put his largely contrarian and value-based approach to work. Not only has he worked in the investment industry, he holds an MBA, is a chartered financial analyst, and still lectures on finance and economics at a college in Victoria.
His approach is partly based on David Dreman's book Contrarian Investment Strategies. The book details how low price-to-earnings stocks with a high yield historically outperform. "Institutions are under a lot of pressure to follow the crowd, so they don't always buy value stocks as they should," Mr. Pearce says. "And, in general, people like to be 'with it,' so there's a bias against buying out-of-favour stocks."
Why He Looks for Yield
As a preliminary screen, he only looks at common shares with a yield of 3 per cent or greater. "Dividends also indicate sustainability of earnings, and that the cash flow will be there."
Why He Likes Low P/Es
"Why pay more when you can pay less?" Low for him means a multiple of 10, and he generally avoids anything with a P/E ratio of more than 20. He also uses a low price-to-book ratio as a key measurement. Book value is important, he says, especially when looking at cyclicals such as mining or forestry, where earnings can be negative on a regular basis. "There is value there but it doesn't show up in the earnings, so you need another yardstick."
"I think my best move was to set a criterion of a 3-per-cent yield. The yield serves to cushion the impact of being wrong and enables me to be paid while I wait."
Writing calls at the wrong time. In early 2009, for instance, he bought Bank of Montreal shares at $28, and then wrote covered calls on them with a strike price of $34, giving the option purchaser the right to force Mr. Pearce to sell them the stock at that price. The stock rose and he did pocket $6 a share, but the shares went on to more than double.
"Take a disciplined approach, look for value, and don't buy whatever happens to be hot."
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© 2007 The Globe and Mail. All rights reserved.
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