Three small cap stocks for a mixed-up market
The market will be hard on stocks that don’t meet lofty expectations, says this Canadian advisory, which prefers three reliable small caps.
Do you feel like a deer in the headlights?
As far as one group of Canadian experts is concerned, that’s how most investors ought to feel these days.
They’re being pulled in two directions, as optimistic economic news is followed by a downer — today, it’s the long-distance ripples from debt in Dubai that is coursing through the markets like a virus.
The market may be exasperating, but that just makes it all the more important to hone in on solid individual stocks. So say the independent researchers who publish KeyStone’s Small-Cap Stock Report.
And that’s what we’ll do. We’ll look at three stocks that this advisory follows closely. These are stocks that are quietly keeping pace with, or even exceeding, estimates in the market.
No room for error
“There is a battle on the horizon between lofty expectations for a rather robust recovery and the real valuations that are appearing given these expectations,” says the advisory.
“Our fear is that as multiples continue to expand, many companies may not be able to hit the lofty expectations in the current climate and the market will react harshly, cutting down those who miss estimates. The current market premiums appear to be pricing in no real room for error and this has increased the broader risk.”
But there are a “select few companies” that have nothing to fear from the market’s expectations, these small cap specialists are happy to report, and a number of them are from their “coverage universe.”
A big turnaround
Boyd Group Income Fund (TSX-BYD.UN) has engineered a big turnaround, this advisory tells us.
It is the largest operator of collision repair service centres in Canada and one of the largest multi-site repair service firms in North America. In Canada, it hangs out two shingles — “Boyd Autobody and Glass” and “Service Collision Repair Centre.” In the U.S., it carries the name Gerber.
Individual drivers, insurance companies and fleet and lease customers all partake of its services. 68 per cent of its revenues are from the U.S., the rest from Canada.
Four years ago this company was a financial wreck. But it has turned itself around in impressive fashion, says the advisory. In the very difficult economic year of 2008, the company posted record levels of sales, net earnings and cash available for distributions.
The unit price has increased by 70 per cent, and there have been five distribution hikes, the latest coming with its recent third quarter report. It now pays $0.30 and yields a hefty 7 per cent.
The firm also has cash for acquisitions and start-ups. Even in a tough economic climate, the company’s financial discipline is keeping it strong (and it has no intention of abandoning the trust structure any time soon).
Boyd thus remains on the advisory’s Focus Buy list. It is relatively illiquid, so the recommendation is to place limit orders in the $3.90 to $4.25 range and “be patient.” It’s above that range just now, at $4.30.
Under the proverbial radar
“Alternative financial services” is the formal description for what The Cash Store Financial Services Inc. (TSX-CSF) does. Founded in Edmonton eight years ago under the blunter title of “Rentcash,” it now has 424 branches in over 160 communities.
That gives it 25 per cent of Canada’s business in this area, and it’s the dominant name on the prairies and in the Maritimes.
“The company’s business,” as the advisory puts it, “is based on the recognition that the needs of a segment of the population is not being met by traditional financial institutions.” Basically, it’s in the business of issuing short-term payday advance loans.
The company is adding new financial products, however, and has entered into an agreement with Calgary’s DirectCash Bank, a chartered institution. This will only give the investment community more confidence in the firm, say these researchers.
“While The Cash Store continues to fly under the proverbial radar in some financial circles, segments of the market are beginning to take notice of the company’s solid focus on shareholder value.”
Bought at $7.20 in June, the stock has rewarded the advisory with a run up to $10.50. And it yields close to 4 per cent. The suggestion is that investors “layer in” at the current price, buying half now, and another half on a pullback of 10 to 15 per cent “if this occurs.”
A large repertoire
Seacliff Construction Corp. (TSX-SDC) of Vancouver has a large repertoire of construction services, from general contracting to electrical contracting. It’s one of the biggest construction outfits in western Canada. It has two distinct units — Dominion Construction, founded in 1911, and Canem Systems, the electrical arm of the company, founded in 1974.
Its clients include just about anyone who could want buildings built — corporations, government agencies, municipalities, property managers and developers.
Seacliff has a strong balance sheet, which allowed it to purchase Broda Construction Group of Saskatchewan this month and still have sufficient cash and cash equivalents for further acquisitions or large projects.
It is coming off a strong third quarter that featured $120 million in new contracts. Revenue growth was modest, but quite satisfactory as far as these researchers are concerned.
Seacliff is clearly going to benefit from infrastructure spending, but the advisory believes that with long lead times, the greatest rewards from this stimulus will show up in 2010.
Purchased in April at $8.00, the stock has risen to $10.50. It yields close to 2 per cent. The advisory’s recommendation for Seacliff is precisely the same as for the previous stock — buy half at the current price and half on a pullback of 10 to 15 per cent.
It’s not full speed ahead for this advisory. In this capricious market, they suggest you buy quietly and patiently into stocks you can trust, and collect the dividends while you wait for your patience to pay off.
That way, you won’t get caught in the headlights.
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