TORONTO (Dow Jones)--Small-cap stocks
have taken it on the chin, but small-cap investors should keep their chins up.
That's the view of Sam Wiseman, chief
investment officer of Wise Capital Management Inc., a Toronto firm with C$120
million in assets under management and manager of a C$2 million small-cap fund
for Blackmont Capital.
"We buy cheap companies with great
prospects, and we know at some point soon we're owed a very big rally,
particularly in small-cap," he told Dow Jones.
Here's why. Wiseman, who uses a
combination of quantitative and fundamental analysis, says valuations are
compelling on both a growth and value basis. Secondly, his own internal
volatility indicator shows there's been a bigger decline in volatility for
small-caps than large-caps, yet small-caps are lagging the market.
"When people jump back in the market,
they tend to jump into large-caps first. They're the most liquid names, and
investors know the names well," he said.
His small-cap strategy has traditionally
outperformed in both up and down markets. Though his small-cap fund's 28%
decline in 2008 isn't much to gloat about on the surface, it's better than the
BMO Nesbitt Burns Small-Cap index's loss of 47% in the same period.
He's a fan of small-caps for several
reasons. For instance, the companies aren't well-covered by brokers, which
allows him to find bargains using his own research. A more timely reason is
that, in the 12 months following a recession, small-caps tend to "greatly
outperform" the market.
Owns Aecon, Migao
Seeking companies that are profitable,
have strong balance sheets and high returns on equity, he's attracted to Aecon
Group Inc. (ARE.T), a play in the hot infrastructure sector. The construction
company boasts a healthy order backlog, which tells him future growth is firm
and lowers risk in the portfolio. It also receives recurring revenue from a
concessions segment, which includes the Cross Israel Toll Highway.
Wiseman also likes the outlook for
agriculture, and holds the lesser-known Migao Corp. (MGO.T), a potash producer
based in China. While "forced deleveraging" left fertilizer stocks bloodied and
bruised, he says the sector will come back because "people are eating better
across the world." Migao is expanding capacity significantly, and he expects
that will result in a doubling of earnings in 2009.
Another commodity-related holding is
Jaguar Mining Inc. (JAG), a gold miner with assets in Brazil. He bought it on
the promise it was going to be "imminently producing gold," and it delivered.
Jaguar can be profitable with gold in the low US$400-an-ounce-range, though he
sees support for gold around US$800.
While Mosaid Technologies Inc. (MSD.T)
is widely viewed as a tech company, its value is actually in its library of
patents, Wiseman said. That gives it consistent royalty revenue streams and the
ability to pay a very high dividend, which isn't typical of the small-cap space.
There are a couple of names that
haven't worked out - he took a loss on one but is holding on to the other. The
former is Guardian Capital Group Ltd. (GCG.A.T), which looked undervalued to him
but got crushed along with other investment firms in the market panic.
However, he's not giving up on North
American Energy Partners Inc. (NOA), a service company in the oil sands. He sees
the price of oil heading back up to US$75 a barrel, and the company will
directly benefit from such a move.
Company Web Site: http://www.wisecapitalmanagement.com
-Andy Georgiades, Dow Jones Newswires;
andy.georgiades@dowjones.com
Dow Jones Newswires
03-31-09 1200ET