What are we looking at?
What money managers are buying for their funds.
It's worth checking out what they own because it's a way of getting stock ideas or doing research on an investment fund. Today, we examine Norrep U.S. Class at norrep.com.
More about the fund
The $6.9-million U.S. small-or-mid-cap equity fund has been managed by Kamran Khan of Hesperian Capital Management Ltd. since 2008. He looks for growth stocks trading at reasonable prices.
The fund gained 32 per cent for the year ended June 30 compared with 24.9 per cent for the Russell 2000 Index in Canadian dollars. Over three years, it has an annualized 9-per-cent return versus 5.8 per cent for the index.
Mr. Khan expects a high single-digit or low double-digit return for the Russell 2000 in 2011. So far, the small-cap benchmark is up 6.2 per cent this year (in U.S. dollars). "We are generally positive on the second half of this year" despite the protracted U.S. economic and market recovery, he said.
"We think this is the same kind of midyear malaise as in 2010 where we had a soft patch or slower economy, but that did not necessarily lead to weaker financial results from companies," he said.
What did we find?
An eclectic mix of stocks, ranging from a prison and cinema operator to a lab-testing company.
Shares of Geo Group Inc., which runs private prisons in the United States, South Africa, Australia and Britain, have gained 4.5 per cent over a year, but still has more upside, Mr. Khan suggested.
The industry is virtually a duopoly in the United States with Geo and Corrections Corp. of America controlling 80 per cent of the private prison beds from bidding on contracts from the federal and state governments, he said.
Geo also generates strong free cash flow, which it can use for building new prisons, share buybacks and acquisitions, he added.
He is also a fan of Cinemark Holdings Inc., which operates movie theatres in the United States and Latin America.
The "real growth engine" is Latin America, where theatre admissions are growing at 30 per cent a year, he said. "They have a strong release slate for movies in 2011. It's up against a weak 2010 so you should see some nice growth in the company this year." The stock has an attractive dividend yield of 4.3 per cent.
Shares of clinical lab-testing company Quest Diagnostics Inc. will be driven by a growing volume of tests expected over the next couple of years, Mr. Khan said. "The fundamentals are very positive with an aging population. …They also have a leading position in the faster growing, higher-margin specialty tests called esoteric testing."
While the company has been hurt by the weak U.S. economy as Americans avoid visits to the doctor, an improving economy, synergies from acquisitions and increasing exposure to faster-growing "esoteric" tests should improve prospects for better revenues and earnings in the second half and 2012, he added.
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