A value investor on the hunt

Treasure include Canam Group

BY DIANNE MALEY
Globe Investor Magazine, May 29, 2009

Who: Irwin Michael, portfolio manager, ABC Funds

The Strategy: To sniff out undiscovered opportunities among stocks trading at a deep discount to their potential value. They may be troubled companies with hidden assets on their balance sheet or a subsidiary that could be sold to shareholders’ advantage. Or they could be thriving, profitable small or medium-sized businesses that investors and analysts have simply overlooked.

Observes Mr. Michael, a deep value manager: “If you buy something well, it’s half sold.”

Key indicators are book value and break-up value, low price-to-earnings and price-to-cash flow multiples, hidden assets on the balance sheet (for example, real estate), management, and the presence of a “value catalyst,” something that could, if it changed, boost the stock price.

This veritable treasure hunt for value has led Mr. Michael to Canam Group Inc., a Quebec-based company that does half its business in the United States. Canam, which designs and fabricates construction products, recently won a $25-million contract to rebuild the Alexander Hamilton Bridge in New York City – in short, an infrastructure play.

“I asked Marc (Dutil, Canam’s chief executive officer) how many bridges needed refurbishing in the United States,” Mr. Michael says. “He said 64,000.”

The company is virtually debt free, it’s earning money, it has a book value of more than $9 a share, he said. The stock is trading at about $7, up from a low of $3.73.

The company pays a modest dividend (for a yield of 2.5 per cent) and has been busily buying back its own shares, leaving a greater proportion of earnings for other shareholders. “We believe Canam will come back nicely.”

When The Strategy Works Best: After getting hammered in last fall’s market crash, deep value stocks are on the cusp of a turnaround, Mr. Michael said. Indeed, his style of investing shines when investors have been humbled by a market correction and are keeping a sharp eye on value.

What Could Go Wrong: A given stock could be undervalued for a reason. “You have to be careful not to get caught in a value trap,” Mr. Michael acknowledges. As well, in falling stock markets, shares of small and medium-sized companies with few analysts following them can be difficult to sell. Finally, even with the best of bargains, the shares could remain undervalued far longer than expected. “You need patience, staying power and clients that understand your style,” he adds.

How Is He Doing? After a tough few months last year, Mr. Michael’s ABC Fundamental Value Fund is up 10 per cent to April 30. In 2008, the fund fell more than 40 per cent, however over the past 20 years its compound annual rate of return was 11.4 per cent. Market Reflections: Mr. Michael believes the North American economy is slowly turning around and he expects to see some better numbers in the second half. “I believe there’s a lot of pent-up demand for goods and services,” he says. “It’s not going to happen overnight, but you’ve got to be ahead of the pack.” With psychology abysmal, “it’s a great time to buy.”

Special to The Globe and Mail