Investors can dig for bargain-bin stocks, but price isn't everything. While the goal is to buy low and sell high, struggling stocks need catalysts to set them climbing. That might be a fresh new management team or potential acquisitions or an expected rebound in an industry.
We asked three portfolio managers for their top picks among battered names that have turnaround potential.
Tim McElvaine, president of McElvaine Investment Management Ltd., Victoria
- Stock: Dundee Corp. (DC.A-TSX)
- Last close: $11.35 a share
- 52-week range: $10.87 to $19.16 a share
Slumping commodity prices have hurt shares of this company, which is controlled by Ned Goodman. "Dundee trades at a big discount to its net asset value of around $20 a share," Mr. McElvaine says. The firm has focused on resources, primarily through a stake in Africa-based United Hydrocarbon International Corp., but there may be confusion about its strategy, he added. Dundee also has interests in real estate and agriculture. But Mr. Goodman's son David, who ran the DundeeWealth unit before it was sold to Bank of Nova Scotia in 2011, became Dundee's chief executive officer last year, and he plans to make wealth management a key business again. He owns nearly 900,000 Dundee shares personally and 6.5 million with his brothers, so he has a financial stake in turning around the company, Mr. McElvaine says.
- Stock: Sprott Resource Corp. (SCP-TSX)
- Last close: 82 cents a share
- 52-week range: 80 cents to $3.34 a share
Shares of this company, which invests in private and listed natural resource companies, have taken a haircut because of falling commodity prices. Sprott Resource now trades at a big discount to its net asset value of around $1.40 a share, Mr. McElvaine says. It has stakes in Independence Contract Drilling Inc., Corsa Coal Corp., Union Agriculture Group Corp., One Earth Farms Corp. and Long Run Exploration Ltd. However, CEO Steve Yuzpe has sold off the firm's gold bullion holdings and is looking to sell other assets to redeploy cash back into the depressed resource sector, he said. As managers continue to acquire more company stock, they have an incentive to rejuvenate the company, Mr. McElvaine adds.
Norman MacDonald, a portfolio manager with Invesco Canada Ltd., Toronto
- Stock: Painted Pony Petroleum Ltd. (PPY-TSX)
- Last close: $7.13 a share
- 52-week range: $5.68 to $14.75 a share
Shares of this natural gas producer in British Columbia's Montney region have taken a hit amid tumbling commodity prices. Painted Pony's land is next to property acquired in 2012 by Malaysia's Petronas to supply liquefied natural gas (LNG) terminals proposed for the B.C. coast. "Painted Pony is also a logical takeover candidate once we see some clarity on whose LNG projects are going ahead," he says. Its stock trades below his calculated net asset value of $12 a share for the company, excluding a takeover. With about $50-million in debt and a $300-million line of credit, the company can finance its own growth, he noted. Management, which owns a lot of stock, has done deals with AltaGas Ltd. and Spectra Energy Corp. to transport gas to various markets. Painted Pony is not just an LNG play, he notes.
- Stock: Trilogy Energy Corp. (TET-TSX)
- Last close: $4.60 a share
- 52-week range: $4.54 to $29.24 a share
Falling commodity prices, a dividend halt and a decision to slash capital spending have taken a big toll on Trilogy Energy's stock. The highly leveraged company produces 30,000 barrels of oil a day in the Montney region, but it's the potential upside from its Duvernay formation gas-liquids play that provides support for its bank line, Mr. MacDonald says. Triology's stock trades below its net asset value of around $10 a share, and the figure excludes the Duvernay play that could potentially add an additional $10, he says. It will take two or three years before production begins there, but the stock could get a lift from key data released by major energy companies drilling in the area. Paramount Resources Ltd. and Calgary's Riddell family own a big chunk of the company, he adds.
Felix Narhi, a portfolio manager with PenderFund Capital Management Ltd., Vancouver
- Stock: Navios Maritime Holdings Inc. (NM-NYSE)
- Last close: $4.18 (U.S.) a share
- 52-week range: $3.30 to $9.59 a share
China's economic dip has dragged down shares of Navios Maritime, a Greek shipping and logistics company focused on dry bulk commodities such as iron ore, coal and grain. "It's been a nuclear winter for the entire sector," Mr. Narhi says. But Navios, a low-cost operator that is 26 per cent owned by founder Angeliki Frangou, has staying power to weather the downturn, and will benefit when the commodity cycle turns, he suggests. The Baltic Dry Index, a shipping and trade indicator, has begun rebounding from February's 30-year low. Navios' stock will also benefit if the firm takes its logistics company public over the next couple of years, he added. Navios' net asset value is in the $6- to $7-a-share range, but its stock could hit double digits in a more normalized environment, Mr. Narhi says.
- Stock: Colfax Corp. (CFX-NYSE)
- Last close: $41.67 (U.S.) a share
- 52-week range: $41.59 to $70.06 a share
Shares of this U.S.-based industrial manufacturing and engineering company have tumbled amid downturns in energy and steel. Colfax is involved in "non-sexy things" like gas and fluid-handling systems and fabrication technology, Mr. Narhi says. With 80 per cent of its business outside the United States and a big chunk in emerging markets, the strong dollar has crushed its profits, he adds. Key to Colfax is the commodity cycle turning at some point, and the fact it is run by the Rales brothers, who also co-founded the highly successful Danaher Corp. "They buy underperforming companies and improve their revenue, margins and cash flow," he says. Colfax is acquisitive, and its shares usually spike after a deal, he added. "It has at least one acquisition planned for the back half of this year."