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Number Cruncher

Small- to mid-cap fund tinged with gold Add to ...

What are we looking for?

What the pros are buying.

The top holdings of a fund can provide several useful stock ideas. Checking out the top holdings is also a way to learn more about an investment fund. Today, we examine the 10 largest equity holdings of BMO Special Equity, which can be found on Bank of Montreal’s website at bmo.com.

More about the fund

The $339.9-million Canadian small- to mid-cap equity fund has been run since 1998 by manager Lesley Marks of BMO Asset Management Inc. The fund gained 31.4 per cent for the year ended Sept. 30 versus 31.2 per cent for the BMO Nesbitt Burns Canadian Small Cap Index. The fund has posted an 8.1-per-cent average annual return over five years and 7.3 per cent over a decade.

Ms. Marks, a stock picker who looks for companies with strong revenue and profit growth, is bullish on her sector. “Small caps tend to do well when people perceive that the economy has bottomed,” she said. “Coming out of a recession, there is a very high correlation between small-cap outperformance and industrial production growth.”

The fund has more than 50 per cent of its assets invested in resource stocks. “It’s a function of where we see the best opportunities for growth in the market,” she said. Strong commodity prices will translate into earnings growth for resource companies, while many industrial or consumer firms are more levered to a North American economic recovery, she added.

What did we find?

Three precious metals stocks in the top 10, including Semafo Inc. and Andean Resources The two have racked up triple-digit gains this year as the price of gold has soared. “Given the large run we have seen in gold stocks, we have done some profit-taking in the group and are moving more to the base metals side, particularly copper,” Ms. Marks said.

Despite its surging share price, Semafo, which mines gold in West Africa, has more potential upside, she said. Rising gold prices have helped to boost cash flow that can be plowed back into exploration for future growth. Her one-year target is $14 a share.

She is also upbeat on Romarco which has a gold exploration project in South Carolina. Its shares have generated interest because of successful drilling results, she said: “The project is high grade so the costs should be fairly low.” Production is expected to start in 2012 or early 2013. She has a target of $2.75 a share.

Auto parts maker Linamar Corp. also has more upside, but “it’s more of a play on the North American economy,” she said. Because of cost-cutting during the downturn, falling competition in the auto parts sector and contract wins, it can still grow earnings substantially in a muted recovery, she suggested. Her one-year target on the stock is $25 a share.

“If they continue to perform as well has they have in the last few quarters, we think Linamar could increase its dividend again.”

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