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Andrew Allentuck

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Growth over time

Andrew Allentuck


WINNIPEG (GlobeinvestorGOLD) - Martin Ferguson uses growth at a reasonable price to identify stocks with the best prospects.

His Mawer New Canada Fund, a $108-million portfolio of Canadian small caps, rose 44.3 per cent in the 12 months ended March 31, 2004 compared with the 65.4-per-cent gain by the BMO Nesbitt Burns Canadian Small Cap Index and peers’ 51.0-per-cent average return in the period. However, for the five years ended March 31, he grew the portfolio at 20.1-per-cent per year compounded annually compared with the 14.8-per-cent average annual gain in the benchmark and peers’ 13.4-per-cent average annual return. Mr.Ferguson, a principal with Mawer Investment Managment Ltd. in Calgary, has piloted the 16-year-old fund since Dec., 1998.

“We look for companies that produce a return on total capital - that’s stock and bonds - greater than the cost of capital," Mr. Ferguson said. "Our model works because it is a universal standard for investment and identifies companies that can reinvest cash flow profitably. It helps us to buy them at attractive prices for the long run."

Russell Metals Inc. is a Toronto-based steel distributor that Mr. Ferguson began to buy in 2000 at an average cost of $4.91. It has recently traded at $9.52 with 32-cent annual dividend yielding 3.4 per cent. In July, 2003, Russell bought Quebec’s Leroux Steel, its largest competitor. That allowed Russell to avoid some price competition and to buy materials in more economical quantities, he explained. The result is that earnings for the year ended Dec. 31, 2005 should rise to $1.15 per share from $1.00 a year earlier and 41 cents in 2003, he said. That would give the stock a 14.2-per-cent return on equity for 2005, he said.

Transat A.T. Inc. is a Montreal-based, integrated travel company that owns several hundred travel agencies and an airline. Mr. Ferguson bought shares this year at an average cost of $15.10 that have recently traded at $16.95. Transat’s system boosts cash flow from operations by investing revenue from holiday sales for months before paying suppliers and by taking profits all the way along its vertically integrated business, he explained. As result, earnings for the year ended Oct. 31, 2005 should rise to $1.50 per share from $1.10 a year earlier and a 27 cent per share loss for 2003, he said. Transat profits should rise as it cuts the types of aircraft it flies from five to two and sells redundant planes, he said. All that should give Transat a return on equity of 20 per cent in 2005, he added.

Uni-Select Inc. is an after-market car parts distributor based in Boucherville, Quebec. Mr. Ferguson bought shares at an average cost of $14.89 that have recently traded at $22.50 with a 27-cent annual dividend equal to a yield of 1.2 per cent. Uni-Select is an efficient operator defended from new entrants by the very low margins it earns in its competitive sector, he explained. It has a quasi-franchise in what he called the “sweet spot” for aging cars in the range of 5 years, when the need for replacement parts rises, to eight years, after which declining trade in values discourages maintenance, he said. Earnings for the year ended Dec. 31, 2005 should rise to $2.00 from $1.90 for 2004 and $1.71 for 2003, he said. That will provide Uni-Select with a return on equity of 17.0 per cent in 2004, he predicted.

Andrew Allentuck writes about investments for The Globe and Mail, and reviews books on finance for globefund.com and globeinvestor.com. He is also the author of several books.

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