Three stocks that fund managers are buying

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This is a new regular feature at Inside the Market that surveys Canadian fund managers on their recent stock purchases.

The fund manager: Jeff Young, chief investment officer, NexGen Financial

The purchase: Dream Office Real Estate Investment Trust

This is one of those non-energy stocks that have come under pressure for having indirect exposure to the oil patch. Dream, which is one of the country's largest owners of city and suburban office properties, was once much more heavily concentrated in Alberta.

Efforts to diversify the portfolio of 24.3 million square feet of leasable office space have reduced the geographic concentration, resulting in about a 16 per cent weighting in Calgary, and another 20 per cent in other parts of Western Canada.

But that was more than enough for investors to target the stock when the oil market came crashing down. Between late-October and early-December, when West Texas Intermediate fell from more than $80 (U.S.) per barrel to less than $60, Dream's stock dropped by 16.5 per cent.

The stock was already bearing the ill effects of high tenant turnover, and concerns for the economy of Western Canada and the effects on commercial real estate combined to the drag share price to the lowest level in more than four years.

"While we concede that these issues exist to one extent or another, we see them largely factored into the price," Mr. Young said. "With management taking positive steps to address what they can, a cheap valuation, a strong balance sheet and an 8.16 per cent yield we see a small position in Dream as an opportunity to add income to the portfolios on a good risk and reward basis."

There is little doubt that the company will struggle to realize growth in net operating income over the next couple of years, but even flat net operating income should suffice in a low-interest rate environment, he said.

Mr. Young doesn't expect any dividend cuts in the near term, and compared to the 1.32 per cent that Government of Canada 10-year bonds yield, he thinks Dream's payout will remain very attractive.

On Feb. 19, after the close of trading, the REIT posted its fiscal year-end results, which reinforced an aggressive leasing approach, a focus on building improvements, and a commitment to buy back stock at a large discount to net asset value, Mr. Young said. The next day, when the stock failed to register any uptick in investor sentiment, Mr. Young added to his holdings of Dream in NexGen's Dividend, Diversified Income and North American Large Cap Funds.

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The fund manager: Bruce Campbell, president and portfolio manager at StoneCastle Investment Management

The purchase: NeuLion Inc.

In early January, Neulion announced a plan to acquire DivX, expanding the company's reach in the online and mobile video market, having already established a promising position in the live streaming of sports content.

But DivX has traded hands at least three times, and has proven an underperformer for each of its owners. Investors, apparently, weren't thrilled about the acquisition.

The deal closed within three weeks, during which time the stock declined by 20 per cent. It was then, in early February, that Mr. Campbell bought into Neulion, establishing a three-per-cent weighting.

He had owned Neulion shares before, but sold his stake last August. By then, the company was generating positive earnings before interest, taxes, depreciation and amortization, but Mr. Campbell felt that the stock's valuation had gotten ahead of the company's fundamentals.

Now here was an opportunity to get back into the stock at roughly the same share price. "It's basically back to the price we sold it at, and they're much more profitable than they were," he said.

DivX was acquired at a valuation of about 6.5 to 7 times EBITDA, while Neulion trades at almost twice that, making the deal potentially accretive, Mr. Campbell said.

"They made the acquisition and the valuation, in our opinion, got cheaper, while the growth prospects got better."

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The fund manager: Greg Newman, senior wealth adviser at Newman Group, a ScotiaMcLeod affiliate.

The purchase: Superior Plus Corp.

After Superior Plus surprised on EBITDA on Feb. 19, Mr. Newman ran the stock through a series of criteria.

Did the company beat forecasts? Yes. Did the stock have upside from what he was willing to pay given this news? He thought so. Is the dividend good and improving? His analysis suggested it is. Is the company's debt level improving? He thinks so. Is there strong appetite for Canadian dividend stocks with improving fundamentals? With bond yields so low, very much so.

Is it a superior quality, low risk, liquid name? Not necessarily. "So unless it grows to approach this, it will not likely become a core position," Mr. Newman said.

He did, however, see enough cause to establish a new, small position in Superior Plus shares at about $12.80.

The company, which is focused on the distribution of propane and other fuels direct to consumers, had been the subject of investor concern after third-quarter costs dragged down the company's energy services division.

The fourth quarter, however, showed stronger-than-expected gross margins and lower operating costs, Mr. Newman said. Also, in October, the company announced a 20-per-cent dividend increase, when some investors thought debt reduction would have been a wiser alternative.

But the company is sticking to its guidance on improving debt metrics. "So my reason to buy was more of a relief of these concerns, combined with the thirst for dividend names that currently exists," Mr. Newman said.

"This is nowhere near my favourite name at this time. But I believe that those that bought at $12.80 will do okay over the next 12 months with a combination of some capital appreciation and the dividend combined."