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Number Cruncher

ABCs of investing: 'patience and staying power' Add to ...

What are we looking for?

What the pros are buying.

It's worth checking out the top securities of funds to get stock ideas. Or, you may even decide to buy the fund itself.

While we normally look at holdings in funds once per quarter, we have decided to do it again given renewed interest in the markets. Today, we look at ABC Fundamental Value. I.A. Michael Investment Counsel Ltd. posts all holdings every quarter at abcfunds.com. However, we were able to get the top 10 securities at Nov. 30.

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More about the fund

The $510-million Canadian-focused, small- to mid-cap equity fund is run by veteran manager Irwin Michael.

The fund gained 41.6 per cent for the year ended Nov. 30, compared with 40.4 per cent for S&P/TSX Completion Total Return, or 27.8-per-cent for the S&P/TSX Total Return. Over 20 years, the fund has posted an average annual return of 13 per cent.

Mr. Michael, who runs an all-capitalization fund and looks for deep-value stocks, says he aims for "absolute return" as opposed to beating an index. The last 12 months have been difficult given the volatile markets, he said. "You need patience and staying power."

What did we turn up?

An eclectic mix of stocks that have already made strong gains from their 52-week lows.

Genworth MI Canada Inc., a residential mortgage insurer, operates in an industry where there is a duopoly as Canada Mortgage and Housing Corp. is the largest and only other player, Mr. Michael said

Genworth is debt free and pays a dividend of 88 cents a year. The company can improve its value by taking on a little debt as a way to increase return on equity, and getting a better yield from its cash on hand by buying securities like preferred shares or high-yielding stocks, he said. His 12-to-18-month target is $30.

ATS Automation Tooling Systems Inc., which builds and installs automated manufacturing systems, is trading above book value of about $6.40 a share, he said. It has "gone through the worst of the cycle," is almost debt free, while management has done an excellent turnaround job, he said. His target is $8 a share over 12 to 18 months.

"The easy money has been made for Genworth and ATS. We bought them as pure value plays. … Now they are becoming growth and momentum plays."

Another stock with potential is private equity player Onex Corp., he said.

The firm is debt-free, and has been recalibrating its business by selling a few assets, and buying a stake in Tropicana Las Vegas Hotel and Casino.

"In this environment, not only is it a survivor, but the stock trades at a deep discount to net asset value," said Mr. Michael. "Because this market will continue to confound investors, you need to have the smarts, be aggressive and not be afraid to make certain moves. We think Onex has excellent management." His 12-to-18-month target is $30 a share.

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