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Number Cruncher

Unearthing the potential of small-cap stocks Add to ...

What are we looking for?

When it comes to making money, small-company stocks can offer lots of potential - if you happen to pick the right names.

One place to look for tips is in the top holdings of mutual funds published monthly or quarterly. If you don't have the time or inclination to do your own research, you might even consider just investing in a fund. Today, we look at Saxon Microcap.

More about the fund

The $7.6-million Canadian small-to-mid-capitalization equity fund, which is run with a value investing style, is co-managed by Scott Carscallen of Mackenzie Financial Corp.

Saxon Microcap invests in companies with a market value ranging from $10-million to $150-million.

A key criteria is "cash-flow-generating capability so they don't have to rely on going to external capital markets," Mr. Carscallen said. "The external capital markets are closed to a lot of these companies right now."

While the fund lost 41 per cent last year when small-cap stocks got clobbered, it beat the 47-per-cent loss by the BMO Nesbitt Burns Canadian Small-Cap Index. So far this year, Saxon Microcap is among the top performers in its category, with an 18-per-cent gain as of Wednesday.

So what did we turn up?

The fund has a 38-per-cent weighting in industrials, followed by 22 per cent in energy. Most of its top-10 holdings have had big moves this year, including a triple-digit gain for Cyberplex Inc. , a small technology company that provides online advertising solutions.

"They see a dramatic move from off-line traditional marketing to more and more of the online marketing," and are well-positioned to capture on that trend, Mr. Carscallen said.

Breaker Energy Ltd. , a junior oil and gas producer, was a recent acquisition. "It has a strong balance sheet, and we really like the management team," he said. It has properties in Alberta, but also a "sexy prospect" in a British Columbia natural gas play that may provide more future growth potential, he added.

K-Bro Linen Income Fund is an income trust whose operating company is the largest provider of laundry and linen services to Canadian heath care and hospitality customers.

"It trades at about six times enterprise value to EBITDA [earnings before interest, taxes, depreciation and amortization] provides a nice yield of 9.4 per cent, has a clean balance sheet, and hardly any debt," Mr. Carscallen said. "It also has a lower-than-normal payout ratio which provides a bit of a cushion."

When incomes trust are taxed like corporations in 2011, Mr. Carscallen expects K-Bro Linen should be able to "coast into the taxation phase without any major disruption to the distribution."

Download the Excel sheet by right clicking on the link below and selecting 'Save as': Top holdings of Saxon Microcap Fund as of March 31, 2009


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