June, 1994
Mutual Funds
Page 3
In growth stocks, there are dreams — and realities
By Michael Ryval
LTHOUGH THE stock market has recently been drifting downward, portfolio managers still see quite a number of growth stocks worth buying, particularly in the technology and communications sectors. On the other hand, they are wary of most retailers, cable firms and certain technology companies with high price/earnings multiples.
One manager particularly bullish on growth stocks is Susan Coleman, portfolio manager of the $403-million Altamira Special Growth Fund (which returned 28.1% for the year ended Apr. 31). Coleman, a vice-president at Toronto-based Altamira Management Ltd., divides these stocks into two groups: those growing steadily and actually earning money today, and ‘’dream stocks” with little or no current earnings but the potential to become Microsofts of tomorrow.
Coleman’s first category includes oil service companies like 3-D seismic services provider Solid State Geophysical Ltd. (recent share price $9.00; 52-week high/low $10/$9.00), and drilling operator Akita Drilling Ltd. ( $4.60; high/low $6/$3.40) and Precision Drilling Ltd ($16.75, high/low $18.50/$ 12.50). "That group,” she says, ‘’is performing well and the earnings are coming through.”
She also likes technology companies that may not be on the cutting edge, but are still doing well. One example is Sidus Systems
Inc. ($16.38; high/low $19.75/$9.75), a firm that customizes personal computers in large numbers. Another prospect is Anchor Lamina Ltd. ($6.62; high/low $8.87/$4.65), which supplies tool and diemakers and is gaining market share because of its unique CAD-CAM (computer-assisted design, computer-assisted manufacturing) technology.
Investors looking for the proverbial doubles and triples might examine Coleman's dream stocks. The key requirement here is fortitude. “In this kind of a market,” she concedes,” a dream stock is the last thing you may want to own. But these are the ones you want to sock away for later. When they start to move, they’ll move in a big way and you won’t be able to buy them.”
Consider, therefore, bio-technology companies like Biocoll Medical Inc., ($3.55, VSE listing, no information available on 52-week high/low), which makes cellulose sponges used in dentistry. Or Bioniche Ltd. ($3.70; high/low $4.70/$3.40), which is developing treatments for prostate and breast cancer. There’s also Allelix Corp. ($7.50; high/low $8.87/$5.50), which is developing medication to combat osteoporosis. ‘’Don’t expect near-term performance out of these,” says Coleman. "But longer-term, some could be tremendous.” Coleman is also watching Softquad International Ltd. ($1.25; high/low is $ 1.90/$ 1.00), a software producer.
Still, Coleman advises against buying technology stocks with very high price-eam-ings multiples. These include Newbridge Network Corp. ($59.25; high/low $97.50/ $46.87) and Delrina Corp. ($18.50; high/low $31.25/$8.75). As these companies get big-
ger, she explains, it becomes progressively harder to achieve the same growth.
Not everyone, however, agrees. John Zechner, portfolio manager of the $320-mil-lion C. I. Canadian Growth Fund (one-year return 18.3%, as of Apr. 30) takes a dim view of most bio-technology stocks. “Few of them have on-going revenues,” says Zechner, who heads J. Zechner Associates Inc. in Toronto. “Even the senior stock in that group, Biochem Pharma Inc., isn’t throwing off revenues. They’re all cash-users, which means they’re constantly coming back to the market for equity.” Essentially, it's too early in the game to buy them, he says.
Zechner is bullish on several companies that make telecommunications equipment and computer software. "We see huge growth in information transfer. But it’s a very tough game, because the technology is changing so quickly you have to have a broad array of companies.” Besides Delrina and Newbridge, he likes Mitel Corp. ($5.25; high/low $12/$3.75), Eicon Technologies Ltd. ($11.75; high/low $15.63/$ 12.25), and Northern Telecom ($43; high/low $49.12/ $27.50). The latter appears to be back on track after re-focusing its product line. Zechner also likes specialized software supplier Geac Ltd., ($13.75; high/low $18.25/ $10.63), because it has branched out from serving libraries to hotels and construction companies.
Another skeptic of the technology sector is Scott Penman, vice-president of equities at Investors Group Inc., in Winnipeg. His one favorite: Sidus Systems. But Penman sees more promise in firms that will benefit from govern-
ment-financed infrastructure programs. As a result, he likes engineering firms such as Banister Ltd. ($19; high/low $20.75/$ 14), which is part of a consortium to build a toll road around Toronto; globally-diversified SNC Group ($17.50; high/low $21.38/$9.87); and specialty steelmaker Harris Steel Group Inc. ($12; high/low $13/$8.13).
Oddly enough, Penman also likes the media sector, now usually considered part of the growth stock category. His best bets include Torstar Corp.($23.75; high/low $27.50/$20.75) and Southam Inc. ($18.38; high/low $21/$ 16). Penman expects consumer confidence to improve by the fall, which will translate into greater advertising lineage and, ultimately, better profit levels for newspapers.
Some portfolio managers, however, see very few growth stocks worth buying. Jonathan Baird, who oversees the $ 155-million Dynamic Canadian Growth Fund (which returned 35.7% for the year ended Apr. 30), and is a vice-president at Goodman & Co., in Toronto, identifies himself as a value investor. As such, he picks stocks selling at a discount to their growth rate. "We don’t want to pay an earnings multiple in excess of a company’s growth rate,” Baird says. "It’s not an economic way to buy a stock.”
In short — growth stock or not — Baird is happy to buy a stock provided he believes it’s a bargain. One example in his portfolio that now meets that criteria is Jetform Corp. (NASDAQ listing: $7.75 (US); high/low $12.50/$4.50). The firm produces software for desktop forms publishing. Says Baird: "Its growth could be explosive, based on the huge size of the potential market.”
Michael Ryval is a Toronto freelance writer.
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