With the recent heavy declines in the stock market, Francis Roche, president of Roche Securities Ltd. in Edmonton, is selectively bargain hunting, but is also advocating caution, as he warns that there could be further evidence of a less-than-robust U.S. recovery as well as disappointing corporate earnings results.
Still, there are opportunities for those willing to do their homework. He is focusing on stocks that have been "overly beaten up."
"There are," he says, "many well run companies with solid balance sheets and good growth prospects, trading at low valuations."
Roche founded his independent full service brokerage nine years ago. It specializes in tracking and financing Canadian small caps.
The case for equities remains intact, he argues. With the rough stock market climate, investors are understandably seeking shelter in fixed income securities and income trusts. But, over the long haul, provided there is good Canadian economic growth, equities can comfortably outperform both bonds and income trusts. There is also a place for small cap stocks within an equity portfolio, he says, as these companies often have the highest earnings growth prospects.
In this challenging market, Roche considers it a sound strategy to take profits in stocks that have done well. Specifically, his "sell" recommendations:
- Buhler Industries Inc. (BUI/ TSX), which recently closed at $5.40 and trades in a 52-week range of $5.49 and $3.35. It was one of his selections in the Feb. 14, 2001, column at $3.40. Based in Winnipeg, this company is a major North American manufacturer and distributor of farm equipment.
- Cott Corp. (BCB/TSX) $25.30 ($33.81 - $18.40), which was another recommendation in that column. At the time, this stock traded at $14. Based in Toronto, this company is one of the world's biggest makers of soft drinks, with operations in Canada, the United States and Britain.
Roche remains enthusiastic about an earlier pick that has since converted from a corporate entity into an income trust:
- Contrans Income Fund (CSSun/TSX) which recently closed at $9.83 and was listed on July 23. Based in Woodstock, Ont., this trucking company offers transportation services throughout Ontario, Quebec, Atlantic Canada and the northeastern United States. "Since the conversion, the trust has announced several planned acquisitions." The conversion to an income trust was done on the basis of four new subordinate voting trust units for one old class A subordinate voting share in the former Contrans Corp. The new units were priced at $9.50 per unit, which was the equivalent of $38 per share pre conversion to a unit trust. Roche recommended the stock in this column on Nov. 22, 2001, when it traded at $14.50.
His new recommendations include a restaurant franchisor:
- Afton Food Group Ltd. (AFF/TSX) 50¢ ($1.40 - 43¢). Based in Burlington, Ont., this company is a leading fast food restaurant franchisor, operating across Canada under such brands as 241 Pizza, Robins Donuts, Mrs. Powell's Bakery Eatery, Donut Delite Café and Ruffage. The stock recently dropped because of the July announcement by the company of the termination of its proposed merger with Pizza Delight Corp. of Moncton, N.B. Roche considers that Afton stands well on its own. "Canadians show little inclination to slow down their consumption of pizza and doughnuts," he says. Also, the stock, at these levels, is "low risk." His earnings per share estimates are 20¢ for 2002 and 25¢ for 2003.
A company offering security services that he likes:
- Voxcom Inc. (VOX/TSX-VEN) 50¢ ($1.70 - 40¢). This stock has come under significant selling pressure, says Roche. Based in Edmonton, this company sells, services and monitors home and business security systems. Roche applauds the company's business model -- "once a customer is signed up, the company gets a steady revenue stream." The company enjoys strong institutional support, with merchant bank Clairvest Group Inc. as its backer. Voxcom was recently recapitalized, he says, with $35.9-million in equity and a $70-million three-year bank credit facility. The company has been implementing an aggressive acquisition strategy that has depressed earnings, he says. Voxcom reported a loss of $2.27 per share for its fiscal year to February, 2002, and $1.79 per share for its fiscal year to February, 2001. Sales for the year to February 28, 2002, were $27.7-million, up from $25.4-million in the prior fiscal year. Roche notes that the company has been showing increasingly improving cash flow and expects this positive trend to continue.
For the more adventuresome, Roche is picking an emerging alternative energy company:
- Carmanah Technologies Corp. (CMH/TSX-VEN) 53¢ (70¢ - 42¢). Based in Victoria, this company designs and manufactures patented proprietary solar-powered LED lanterns and lights for the marine, transit, roadway and railway markets. Roche favours solar energy stocks as he notes that this technology is proven, in contrast to other "more speculative types of alternative energy, such as fuel cells." Of Carmanah, he says that its sales were initially primarily to the U.S. and Canadian military, but it has branched out to private sector buyers mainly in the transportation industry. Roche is looking for the company to double its sales to $7-million at the end of this year. It has yet to turn a profit.
For the more aggressive investors with an interest in mining stocks, Roche has been recently recommending that investors take profits in junior gold producers and buy junior diamond exploration companies. He is looking for investor interest in this sector to increase once Canada's Diavik diamond project, located near Yellowknife and owned by Aber Diamond Corp. and global mining giant Rio Tinto, goes into production in early 2003. His two selections:
- Shore Gold Inc. (SGF/TSX-VEN) 65¢ ($1.21 - 50¢). Based in Saskatoon, this company has a 100% interest in the Star Diamond project near Prince Albert, Sask. This is early stage, he cautions. The presence of diamond fragments have been confirmed, he says, and the company is planning to undertake a substantial bulk sample to confirm grade and tonnage.
- Northern Empire Minerals Ltd. (NEM/TSX-VEN) 23¢ (96¢ - 12¢). Based in Vancouver, this diamond exploration company has major landholdings of some 3.5 million acres. Northern Empire has 16 diamond properties in the Coronation Diamond District in Nunavut. There have been a number of kimberlites discovered there. Two of these, Potentilla and Stellaria, are on the Kikerk Lake claims, 30% owned by Northern Empire. It also owns properties on the Melville Peninsula, an emerging diamond area and on the Rankin Inlet area of Nunavut.
Finally, Northern Empire owns two diamond properties in the Otis Mountains region of Quebec. "The company is well funded and has an aggressive acquisition and development strategy."