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Betting on a North American recovery

swon@globeandmail.com

What are we looking for?

What the pros are buying. Checking out the top holdings is a way to get stock tips, or research a fund you might want to buy. Today, we look at GBC North American Growth Fund at http://www.gbc.ca.

More about the fund

The $106.7-million GBC North American Growth Fund is co-managed by Jeffrey Tory of GBC Asset Management Inc.

In its recent history, the fund has been in the North American equity category, but it began shifting its focus six months ago to just U.S. stocks.

The fund gained 23.1 per cent for the year ended Oct. 31.

It outpaced the 10.2 per cent for the S&P 500 composite total return and 19.7 per cent for the Russell 2000 index, both in Canadian dollars.

The fund focuses on small to mid-sized U.S. growth stocks so the names often fall in the technology and health-care areas.

The earnings of these firms, which are leveraged to a continued economic recovery and are benefiting from cost-cutting, have generally exceeded analysts' expectations, Mr. Tory said.

These stocks have also outperformed the U.S. large-cap stocks in recent years, but are no longer as cheap as they used to be, he said. Still, the smaller companies are "poised to continue to do well ... because the underlying fundamentals remain strong," he said.

"There is actual revenue growth coming out of the Russell 2000 stocks."

What did we find?

An eclectic mix of names in the fund - from a provider of electronic government services to an auto parts dealer and a financial services company that runs pay-day loan outlets.

NIC Inc., a U.S. provider of state e-government services and processor of transaction payments, has potential despite its lacklustre stock performance after missing earnings expectations early in the year, Mr. Tory said. But the company is attractive because it has a "recurring revenue stream" that will increase as more state governments go online, while it also offers an annual dividend, he said.

O'Reilly Automotive Inc., an auto-parts chain that has been in the fund for 17 years, also has more legs, he said.

"It has grown very successfully over the years through organic growth and acquisitions." In 2008, it bought auto parts retailer CSK Auto Inc., which was a "game-changing acquisition," he said. O'Reilly is benefiting from a rebound in consumer spending, and should see earnings per share jump north of 30 per cent this year and probably 15 per cent in 2011, he added.

Mr. Tory also likes financial services company Dollar Financial Corp., a leader in the payday loan business in Canada (through its Money Mart outlets) and also in Britain.

"It has made a couple of interesting acquisitions in Europe, such as a pawn-shop business, and an Internet lending business where consumers apply for loans online."

The company, which is poised to generate strong earnings growth next year and 2012, trades at about 12 times 2010 earnings, he said.

***

TOP TEN HOLDINGS IN THE GBC NORTH AMERICAN GROWTH FUND AT OCT. 31

Company nameSymbolUS$ Price Dec. 752-wk high $52-wk low $YTD % price chgP/E%YieldMarketcap ($-mil)Volume
NIC Inc.EGOV-Q8.769.445.90-4.236.50557290,729
Forrester ResearchFORR-Q33.0136.3123.6527.228.2074595,875
Amerigon Inc.ARGN-Q10.7211.966.9135.030.60232380,770
Varian Medical SystemsVAR-N67.6369.4535.5044.422.808,2261,650,136
O'Reilly AutomotiveORLY-Q60.5462.4036.9158.821.708,4011,771,341
Internet Capital Group Inc.ICGE-Q13.0613.485.7696.46.10476207,149
World Fuel ServicesINT-N32.3032.7422.1920.613.80.52,181471,775
Catalyst Health SolutionsCHSI-Q46.0546.7131.4026.326.802,064195,256
Dollar FinancialDLLR-Q28.2328.4314.9019.485.50688254,446
LivePersonLPSN-Q10.3310.595.7148.257.40527360,082
All figures are in U.S. dollars. Source: Globe Investor

© 2007 The Globe and Mail. All rights reserved.

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