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Number Cruncher

The best of Canada's little guys Add to ...

What are we looking for?

What the pros have been buying among Canadian smaller-company stocks.

It's worth checking the holdings in mutual funds because they reveal their top securities after each quarter. Some even do so monthly.

The list can give an idea of what stocks have potential. You could start your own research this way, or suggest the stock to your financial adviser. You might even consider investing in the fund. Today, we look at National Bank Small Capitalization Fund.

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More about the fund

The $492-million Canadian focused small- to mid-cap equity fund has been managed since 2005 by Christian Cyr of Montreal-based Natcan Investment Management Inc. He typically looks for bargain stocks that have growth potential over the next three to five years.

This fund climbed 26.4 per cent for the first six months of this year compared with 14.5 per cent for the S&P/TSX completion total return, which tracks small- to mid-cap stocks. Over one year, the fund is off 19 per cent, but much lower than the 29.6-per-cent loss for that index.

What did we turn up?

Smaller-company stocks got hammered last year, but have been bouncing back this year as indicated by the returns in most holdings. "Even though they [small caps]are cheap, it's not dirt cheap like they were earlier in the year," says Mr. Cyr, who looks for firms with strong balance sheets.

Sporting good retailer Forzani Group Ltd. , which operates under banners like Sport Chek and Coast Mountain Sports, was the largest weighting.

While the retail environment is tough, Forzani is doing "the right things" from managing inventory to renovating stores in order to position itself for an economic recovery, he says. "I am pretty sure that the earnings per share potential will be greater three years from now than two years ago."

TransForce Inc., a Montreal-based truck and logistics firm, is on a tough road right now because of the economic downturn, but it is managing to keep costs in line, he says. Its stock price could move pretty quickly if the economy shows signs of turning around by the end of the year, Mr. Cyr adds.

Montreal-based Logibec Groupe Informatique Ltd., which specializes in information systems for the health and social services sector in North America, is also among the top 10 stocks.

Because 80 per cent of the company's revenue is recurring from maintenance contracts, it allows Logibec a little bit more leeway in leveraging its balance sheet, he says.

"Their model has been to grow organically, and to grow by acquisition by leveraging themselves, integrating the company, and then paying down their debit with recurring revenues," says Mr. Cyr, who has held the stock for about three years. "It's a type of company that you put in a portfolio and let it run."

 

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