News from The Globe and Mail


Saturday, May 07, 2005

Most investors wince when the stock market tumbles. But for value investors such as Chris Blake, there's nothing quite as exhilarating as a market correction.

"I'll tell you, six months ago we were having a tough time finding names. Right now, I'm awash with them," says the co-manager of GGOF American Value Fund and managing director with Lazard Asset Management in New York.

Like early-risers who scour yard sales on Saturday mornings for hidden gems, value investors specialize in hunting for solid stocks that are overlooked, unloved or beaten down by temporary setbacks. Where others see scuffs and scrapes, they spy opportunities.

This week, billionaire Kirk Kerkorian announced plans to double his stake in General Motors Corp., sending the downtrodden shares up 18 per cent in one day. Less than two weeks earlier, news surfaced that fellow billionaire and value-investing legend Warren Buffett had bought a stake in Anheuser-Busch Cos. through Berkshire Hathaway Inc., lifting the brewer's depressed stock nearly 7 per cent.

A key premise of value investing is that markets usually overreact to negative news, pushing stocks below their true value as the herd mentality takes hold. That's when value investors swoop in and pick up shares at a hefty discount.

To be successful, a strong contrarian streak is essential. Having loads of patience is also important, because the market often takes years to recognize the value it's been overlooking. And during that time, a stock can give investors fits.

"Most people probably can't be value investors because they don't have the temperament for it. They'll buy a few stocks and then they'll get spooked out of them and sell," says Norm Rothery, founder of and a financial consultant with Dan Hallett and Associates Inc. of Windsor.

Uncovering value also requires some facility with numbers. No two value investors share the same approach, but most delve into ratios such as price/earnings, price/cash flow, price/book value and debt/equity. Like batters waiting for the perfect pitch, some will watch a stock for years until the ratios enter their strike zone.

There wasn't much to swing at for years. But now, with the market well down from its highs, more fat pitches are crossing the plate.

"We're seeing some fantastic values because of what the market has done. Really, at the end of February, we couldn't find anything except for outside of Canada," says David Taylor, a value-oriented portfolio manager at Dynamic Mutual Funds.

Here are some samples.

Rummaging through the bargain bin

Value (vælju), n. The relative status of a thing, or the estimate in which it is held, according to its real or supposed worth, usefulness, or importance. -- Oxford English Dictionary

Westwood One

Shares of the company, which produces content for radio stations -- including news, traffic and weather reports - have been hammered by a slump in ad rates, GGOF's Chris Blake says. But Westwood still spins money like a DJ spins CDs, pumping out more than $20-million of free cash flow in the first quarter. This week, it initiated a 10-cent quarterly dividend.

Royal Caribbean

Shares of the cruise operator have sprung a leak amid rising fuel costs, but investors need to get a grip, Mr. Blake says. Cruise ships use low-grade bunker fuel, which is cheaper than gasoline. And even after factoring in the added costs, analysts expect earnings to rise 22 per cent to $2.76 a share in 2005. If fuel costs fall, "these guys are just going to mint money," he says.


The steelmaker has hiked its dividend twice this year as profits soared. Yet the stock plunged about 20 per cent from early March to mid May, before rebounding. Sure, steel prices have softened, but demand remains robust for the plate Ipsco supplies to manufacturers of heavy equipment and rail cars, Dynamic's David Taylor says. So when the stock tumbled, he doubled his position.

AGF Management

The fund company "is facing massive redemptions ..... month after month the numbers are just godawful," Mr. Taylor says. AGF is too big to be a niche player, but lacks the scale of larger competitors. So what's to like? "They probably would look really nice in the hands of somebody else," he says. If the Goldring family ever decides to sell, he thinks the stock could fetch $25.

Hart Stores

Few stocks are more overlooked than Hart, which operates junior department stores, primarily in Eastern Canada. Most days, only a few thousand shares trade on the TSX- and sometimes none at all. But's Norm Rothery notes that Hart is profitable, growing modestly, and sports an attractive p/e of less than 8. It even pays a dividend, for a yield of 2 per cent.

Amisco Industries

Another of Mr. Rothery's small-cap favourites, the Canadian manufacturer of tubular steel furniture has a dividend yield of nearly 8 per cent. And last year, it paid a special dividend of $2.45 a share. Higher steel prices and competition from China have hurt, "but they just seem to collect up cash and they've decided to start paying it to investors, which is awfully nice," Mr. Rothery says.


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