What are we looking for?
This is our final look this week at the top holdings of a Canadian smaller company fund. Small- to mid-cap stocks can offer potentially better returns because they're not widely covered by The Street.
It's worth checking out the top securities of funds to mine for stock ideas. Today, we look at Sprott Small Cap Equity Fund.
“The small-cap sector has underperformed the TSX Composite Total Return for five years in a row from 2004 to 2008,” says its lead manager Allan Jacobs. “Historically, it has been a better time to buy them [small caps] in general after they have underperformed quite a few years.”
More about the fund
The $92.7-million Canadian small- or mid-cap equity fund is run by Mr. Jacobs along with Peter Imhof at Sprott Asset Management LP. The pair, who jumped ship in 2007 from Sceptre Investment Counsel Ltd., look for growth stocks trading at a reasonable price, and companies that are well-managed and have clean balance sheets.
Last year was the only year when the two failed to beat the Canadian small-cap index in their eight years working as team. “It was a humbling experience,” Mr. Jacobs says.
For the first six months of this year, however, their fund gained 28.2 per cent compared with 18 per cent for S&P/TSX Small Cap Total Return (its benchmark). Over one year, it has posted a 43.7-per-cent loss compared with a 35.5-per-cent loss by that index.
What did we turn up?
Most of the top 10 companies in the fund have reported rising profits in recent quarters, Mr. Jacobs says.
Apparel retailer Le Château Inc.'s CTU.A-T earnings were rising until the last quarter when they were flat, but that is still “pretty good” given the current tough economic environment, he says.
Le Château is a “cheap stock” trading at about 7.4 times trailing earnings, and has a dividend yield over just over 6 per cent, he adds. “It has also got $2 a share in cash [on its balance sheet].”
Glentel Inc. GLN-T , which is Canada's largest mobile phone retailer, has seen its earnings grow at about 30 per cent a year. “They are doing really well,” he says. “It is trading at about eight times trailing earnings, pays a dividend and has got $2 a share in cash … A lot of people don't want to buy it because it is a thinly traded stock.”
Avion Gold Corp., AVR-X which has a gold project in Mali, raised money last year at 50 cents a share, but its stock got hammered to as low as 2 or 3 cents a share, Mr. Jacobs recalls. “I bought the stock in an issue in the first week of January when the stock was at 8 cents a share. Avion has gone into production, and the stock is about 35 cents a share.”
It is trading at a “low multiple for a gold stock at three times cash flow,” he noted. “When it gets well known, the stock will be quite a bit higher. We look for cheap stocks that no one has heard of. When there is no coverage, it's perfect.”
