As many money managers had expected, small-capitalization stocks outperformed large-cap stocks by a wide margin throughout 2009. The big question now is whether that trend is over.
In the year ended Nov. 30, 2009, the BMO Nesbitt Burns small-cap index rose by more than 66%, compared with the S&P\/TSX composite index, which increased by 34%.
Money managers don\u2019t think the small-cap index will outperform again this year. However, many say, there are still opportunities for growth in sectors outside of resources and materials. \u201cExcluding those sectors, there\u2019s room for small-cap stocks to outperform,\u201d says Martin Ferguson, manager of Mawer New Canada Fund and director with Calgary-based Mawer Investment Management Ltd.<\/b>
Like Ferguson, Ian Cooke, portfolio manager of QV Canadian Small Cap Fund, sponsored by Calgary-based QV Investors Inc. <\/b>, is tipping his portfolio away from resources and financial services.
Both of these money managers tend to steer away from momen-tum and to focus instead on well-capitalized companies that can withstand periods of sluggish economic growth. Here\u2019s a look at the companies they like:
> Financial services<\/b>
Compared with their large-cap brethren, Cooke says, small-cap financials are available at low price\/book ratios. He likes Laurentian Bank of Canada<\/b>. Its commercial and residential lending books are prudent. He expects Laurentian\u2019s share price could rise as earnings increase, and its dividend, which is 3% today, could also rise.
Ferguson says financials represent his largest weighting and his greatest overweighting vs the small-cap index. He likes this varied sector because, as a general rule, financial services companies understand return on equity. He owns shares in a variety of companies, including Canadian Western Bank<\/b>; alternative credit provider Home Capital Group Inc. <\/b>; real estate names such as Allied Properties Real Estate Investment Trust; and Morneau Sobeco Income Fund, the largest provider of pensions and benefits consulting in Canada.
> Technology<\/b>
Both money managers favour Constellation Software Inc., which owns a number of software applications that its large clients in various industries rely on.
\u201c[Constellation has] a business model that generates a lot of cash flow,\u201d Cooke says, \u201cand [the firm] can reinvest it into consolidating the small software provider industry.\u201d
Ferguson holds Logibec Groupe Informatique Lt\u00e9e, which provides software to the medical and pharmaceuticals industries in Quebec and in the U.S.
\u201cIt has a strong balance sheet and is a free cash-flow generator,\u201d Cooke says.
> Industrials<\/b>
This sector is dependent on stronger economic growth. It has lagged others in the small-cap group as the cyclical shrinking of the sector heavily outweighed the positive infrastructure story in 2009, says Ferguson. Generally, he\u2019s been trimming positions in this sector and adding when valuations are lower. One example is Stantec Inc., which, he says, remains an \u201cextremely well-run company that we think is attractively valued.\u201d
As prices have declined, Ferguson has also added weight to his holdings of New Flyer Inc. The Manitoba-based bus manufacturer has had some production issues, he says, but it has maintained its distribution system and has back orders for buses.
> Consumer discretionary<\/b>
Both money managers like used autoparts distributor Uni-Select Inc., a countercyclical play \u2014 when times are tough, consumers often prefer to repair their vehicles rather than buy new ones.
Ferguson also likes MYT Food Group Inc., Canada\u2019s largest franchisor of fast-food restaurants in malls. Franchisees pay to run businesses such as Thai Express and TCBY. \u201cIt\u2019s a good business that\u2019s not capital-intensive,\u201d Ferguson says, \u201cand it generates free cash flow.\u201d
\t\u2014 GAVIN ADAMSON<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"
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