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Number Cruncher

Looking for big value in small caps Add to ...

What are we looking for?

What the pros are buying.

You can get investment ideas by checking out the top holdings in their funds. This is particularly true in the small-cap arena, where companies are not often household names. Today, we look at BMO Guardian Enterprise Fund at bmoguardianfunds.com.

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The $211-million Canadian small or mid-cap equity fund has been run Martin Ferguson of Calgary-based Mawer Investment Management Ltd. since 2004. The fund gained 17.1 per cent for the year ended Aug. 31 versus 18.8 per cent for the BMO Nesbitt Burns Canadian Small Cap Index. Over five years, the fund has earned 5.9 per cent annually compared with nearly 5 per cent for the index.

That fund is a clone of the lower-fee, $603-million Mawer New Canada Fund run by the same manager since 1998, but is now closed to new investors. This index-beating fund has gained 14.7 per cent annually over 10 years.

Mr. Ferguson looks for companies with strong competitive advantages that can generate a high return on invested capital. Despite the market volatility, he expects his fund can generate “modest returns” over the next year, and sees the small-cap sector as “reasonably valued.”

There are opportunities in financial companies, such as alternative mortgage lenders, and energy service companies that can have competitive advantages by being a leader in their niche, he said.

What did we find?

Home Capital Group and Stantec Inc. emerge among the harder-hit stocks in the top 10 this year.

Home Capital has been under pressure because of concerns over a slowdown in the Canadian housing market, but shares of the mortgage lender still could reasonably generate a return about 30 per cent over the next 12 months, Mr. Ferguson suggested. The company can still do well because the residential first-mortgage arena tends to be quite stable, and some U.S. rivals have left the domestic market. It “is a very well-run company” catering to recent immigrants, the self-employed and others who don’t qualify for bank mortgages, he said. It has enjoyed an average return on equity of 27.8 per cent over the last 10 years, he added.

Shares of Canadian engineering services firm Stantec, which has been profitable for more than 40 straight years, have take a haircut amid economic concerns as half of its business is in the United States. But he is still a fan of the company, which generates a “very reasonable return on equity of over 15 per cent.” Stantec recently said it could grow revenue by 10 to 15 per cent per annum over the next five years with 3 per cent coming from organic growth and the rest from acquired companies, he added. “Stantec has a very good track record of doing accretive acquisitions.”

Mr. Ferguson also likes Canadian Energy Services and Technology Corp., which has been holding up well in this year’s volatile market. This drilling fluid systems company has some of the best products available to extract oil and gas from different rock geologies, he said. Over the last five years, the company has grown market share in Canada and is now gaining traction in the United States, he said. A 30-per-cent return on this stock is possible over the next year, he added.

 
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  • CEU-T
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