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 | Manager upbeat on small caps
Sector's 2003 returns should be in low double digits, TED WHITEHEAD tells ANGELA BARNES
By ANGELA BARNES
Thursday, November 21, 2002 – Page B21
Fund manager Ted Whitehead expects the Canadian small-capitalization market, which has slowed in recent months, to regain momentum and rally between now and year-end, and then continue to rise next year.
Mr. Whitehead, the portfolio manager and assistant vice-president of Toronto-based Elliott & Page Ltd., sees the small-cap market showing returns next year in the low double digits.
So far in 2002, small caps have outperformed large caps, just as they did last year. The BMO Nesbitt Burns small-cap index is down about 6.2 per cent this year, while the Toronto Stock Exchange's S&P/TSX composite index has fallen 15.6 per cent.
If the Canadian economy continues to grow next year, then small caps should benefit relatively more than large caps, Mr. Whitehead said. The small-cap sector is biased more toward the economically sensitive cyclicals and consumer stocks, whereas the large-cap sector is more heavily weighted toward financial issues, he said.
Mr. Whitehead uses both quantitative and fundamental analysis to pick the 80 to 85 small- and mid-cap stocks that make up the Elliott & Page Growth Opportunities Fund portfolio. He selects companies that have recorded upside earnings surprises or whose earnings estimates have been revised upward. History suggests such stocks tend to outperform. He also looks for stocks that have a lower price/earnings multiple and a higher growth rate than the market. Three stocks that fit those requirements, and which Mr. Whitehead has bought or added to recently, are:
Cinram International Inc. (CRW-TSX). The Toronto-based maker of DVDs and video and audio cassettes surprised the market when it unveiled its third-quarter results Nov. 4, showing a profit of 27 cents a share, much better than had been expected. Mr. Whitehead also likes the fact that Cinram's shares have been steadily improving of late. They closed yesterday at $9.09 on the Toronto Stock Exchange, having risen from a 52-week low of $3.75 on Nov. 21, 2001. The 52-week high of $11.25 was established June 6. He expects the company will earn about 88 cents a share next year, which gives it a P/E multiple of 10.3 times.
Aur Resources Inc. (AUR-TSX). Toronto-based Aur Resources Inc. also had an earnings surprise, Mr. Whitehead said. The company is "one of the few pure plays in copper in Canada." Furthermore, it is a play on the economic recovery and "seasonally, the metal stocks tend to do well from November to February," he said. He also notes that the shares trade at a discount to book value. Aur is forecast to earn 15 cents a share next year. The shares closed yesterday at $3.08, which is higher than the 52-week low of $2.20 set on Oct. 8, but well below the 52-week high of $5.42 established June 7.
Methanex Corp. (MX-TSX). Shares of Methanex, a mid-cap issue, ended yesterday's session at $14.10, coming within 60 cents of its 52-week high, and far above the 52-week low of $7.83 established last December. Vancouver-based Methanex recently beat analysts' estimates for its third quarter, turning in a profit of 47 cents (U.S.) a share, which was 10 cents above the Street estimate. Methanex is a world leader in the methanol market, supplying about a quarter of global demand, Mr. Whitehead said. He also notes that there shouldn't be any new methanol supply coming on to the market before 2004 and that the company declared its first quarterly dividend of 5 cents a share in July.
In a May 3 Best Bets interview, Mr. Whitehead mentioned Russel Metals Inc. (RUS-TSX), Sears Canada Inc. (SCC-TSX) and Gildan Activewear Inc. (GIL.A-TSX). He continues to like Russel, a Mississauga-based steel distributor. Russel's shares closed yesterday at $5.00 (Canadian), up from the $4.60 they were trading at on May 2, but down from the 52-week high of $5.49 they set on May 27.
He sold shares of Toronto-based Sears Canada at varying times and prices, in part over concerns about sales trends at department stores. The shares dropped from $23.75 on May 2 to a 52-week low of $15.15 on Oct. 10. They closed at $17.85 yesterday.
Meanwhile, shares of Gildan, a Montreal-based casual apparel supplier, climbed from $29.35 to a 52-week high of $37.60 on June 20. They have since eased back, closing at $33.15 yesterday. Mr. Whitehead says he still owns the stock and feels that the company's earnings will be in line with expectations or better.
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