WINNIPEG (GlobeinvestorGOLD) – Michael Simpson continues to generate strong returns in Canadian small caps.
His Sentry Select Small Cap Income Fund produced a 9.8-per-cent gain for the 12 months ended Jan. 31, 2008. That was a contrast to the 7.3-per-cent loss by the BMO Nesbitt Burns Canadian Small Cap Index in the period. The result put the fund close to the top of the first quartile of peer Canadian small to mid-cap fund performance for the year. Mr. Simpson, a senior portfolio manager at Sentry Select Capital Corp. in Toronto, has managed the $43-million fund since inception in July, 2005.
“We are fundamentally value investors,” Mr. Simpson said. “We scrutinize cash flow and the ability of the company to reinvest it profitably in its business and pay dividends. We look at companies that are cheap compared to competitors. That leads us to companies that have little or no analyst coverage. We consider historical growth rates and we look at margins, stability, and the ability of companies to maintain their margins over time. The current market has created buying opportunities and we are shopping for small caps with sustainable free cash flow and dividends.”
Lassonde Industries Inc. is a Rougemont, Quebec-based processor of fruit and vegetable juices. Shares purchased at an average cost of $37.89 have recently traded at $42 with a 50 cent annual dividend equal to a yield of 1.2 per cent. Lassonde is dominant in the Quebec market and is adding fresh flavours like pomegranate to its lineup, capturing customers as sales of soda pop decline, Mr. Simpson said. As a result, revenues were up 10 per cent for the first nine months of 2007 and earnings for the year ended Dec. 31, 2008 should rise to $2.93 per share from $2.80 a year earlier, he added. Within 12 months, shares should trade at $45, Mr. Simpson said.
Addenda Capital Inc. is a Montreal-based investment management firm specializing in bonds and fixed income. Shares purchased at an average cost of $22.54 have recently traded at $21.28 with a $1.32 annual dividend equity to a yield of 6.2 per cent. Addenda was thought to have a large exposure to asset-backed commercial paper. That worry caused its shares to plummet. The exposure, in fact, is small and the company has no long-term debt. There are few fixed assets in the business, so return on capital, 136 per cent per year, should be sustainable, Mr. Simpson said. Earnings for the year ended Dec. 31, 2008 should rise to $1.70 from $1.48 a year earlier, he suggested. Within 12 months, shares should hit $23, he said.
Con-way Inc. is trucking company based in San Mateo, California. Shares purchased at an average cost of $41.23 (U.S.) have recently traded at $46.94 with a 40 cent annual dividend equal to a yield of just under one per cent. Earnings for the year ended Dec. 31, 2009 should rise to $4.60 from $3.90 a year earlier and $3.34 for 2006, Mr. Simpson said. The company has purchased a logistics company in Asia and has been investing in new, fuel-efficient trucks. Within 12 months, shares should trade at $50, he suggested.