(Gyle Konotopetz regularly profiles the top three stock picks of some of Canada's most accomplished investment pros.) FEATURED PRO: Peter Arender is vice-president and portfolio manager at Acker Finley Asset Management (www.ackerfinley.com). The Toronto firm manages the QSA series of funds.
Fund form: The QSA Canada Focus Fund has a six-month return of 13.3 per cent compared to the group average of 6.8 per cent. The U.S. Select Value 50 Fund has a six-month return of 3.4 per cent compared to the group average of -7.6 per cent.
Arender's Perspective: "Our view on the overall market is that there may be 20-30 per cent upside on the S&P/TSX (index) from current levels and probably around 30-35 per cent upside on the S&P 500 (U.S. index) from current levels. That doesn't mean the market needs to get there tomorrow and it doesn't mean it will even get there in a year. It just gives us some comfort that the market is not what we would call expensive right now.
"Further to that, it's probably important to point out that, in Canada, a good part of the underpricing or undervaluation is coming from the energy sector where we're finding a disproportionate amount of value in the Canadian market. So, if you strip out the energy sector in Canada, the Canadian market doesn't look as attractive as the U.S. market. In the U.S., we're seeing value in a broad range of sectors and therefore we're slightly favouring the U.S. market at this time.
"I should also point out that I don't necessarily favour U.S. stocks in US dollars. We have a U.S. fund (the U.S. Select Value 50 Fund) in which we hedge the currency (to protect against currency fluctuations) and, based purely on the upside in stock prices, my top three picks are U.S. stocks. It's kind of rare to have a nice selection of big U.S. companies that you're able to buy cheaper than you think they're worth."
First Star
* Merck & Co. (NYSE:MRK)
* Recent Price: $27.12 US
* 52-Week Range: $25.60-$49.33.
* Snapshot: Merck is a pharmaceutical giant that develops, manufactures and markets a vast range of human and animal health products. The company also provide pharmaceutical benefits services through subsidiary Merck Medco Managed Care.
* CEO: Raymond Gilmartin.
* Head Office: Whitehouse Station, N.J.
* Vital Stats (U.S. dollars): Current Price/Earnings Ratio, 9.9; Revenue (last 12 mos), $18.6 billion; 5-Yr Revenue Growth, 6.4 per cent; Earnings (last 12 mos), $2.0 billion; 5-Yr Earnings Growth, -2.4 per cent; Market Cap, $60.14 billion; Shares Outstanding, 2.22 billion; Dividend Yield, 1.52 per cent.
* Arender's View: "This is a bit of an unpopular one right now. They've had some pretty well-publicized problems, obviously with Vioxx (a blockbuster drug that was recalled). There's pressure on the top line (revenue), there are some product-specific problems and there's a feeling that their pipeline is not as full of blockbuster drugs as one would hope. That's why the stock has been pummelled.
"However, we now have a stock that reached a high of $90 US in 2001 that is available for about $27. We think investors have leaned on it too hard and believe it's worth somewhere in the mid-30s to high 30s. I think they've still got a very solid underlying income stream."
* Arender's Risk Rating: Medium.
* Web Watch: www.merck.com
Second Star
* McDonald's Corp. (NYSE:MCD)
* Recent Price: $29.30 US
* 52-Week Range: $23.01-$30.99.
* Snapshot: McDonald's operates a system of quick service-style restaurants in more than 100 countries.
* CEO: Jim Skinner.
* Head Office: Oak Brook, Ill.
* Vital Stats (U.S. dollars): Current Price/Earnings Ratio, 18.5; Revenue (last mos), $22.8 billion; 5-Yr Revenue Growth, -7.1 per cent; Earnings (last 12 mos), $6.1 billion; 5-Yr Earnings Growth, three per cent; Market Cap, $36.83 billion; Shares Outstanding, 1.26 billion; Dividend Yield, 1.80 per cent.
* Arender's View: "Since McDonald's stock peaked in 1999 and 2000 at around $45 US, it came into difficult times. They were having difficulties with strategies and trying different things on their menus. They were just having trouble getting traction. I think that since 2003 they've made some positive changes and I think the new management is going to take the company forward in a positive direction. We calculate the stock to be worth in the low $40s US."
* Arender's Risk Rating: Low.
* Web Watch: www.mcdonalds.com
Third Star
* Applied Materials (Nasdaq:AMAT)
* Recent Price: $16.99 US
* 52-Week Range: $15.36-$24.75.
* Snapshot: Applied Materials is a technology company that develops, manufactures, markets and services circuit fabrication equipment for the global semiconductor industry.
* CEO: Michael Splinter.
* Head Office: Santa Clara, Calif.
* Vital Stats (U.S. dollars): Current Price/Earnings Ratio, 21.8; Revenue (last 12 mos), $7 billion; 5-Yr Revenue Growth, 0.7 per cent; Earnings (last 12 mos), $911.7 million; Market Cap, $28.85 billion; Shares Outstanding, 1.7 billion.
* Arender's View: "We're now finding a fair number of technology stocks that are looking inexpensive and Applied Materials is one of the most attractive ones. A lot of semiconductor stocks are appearing to have been beaten up too far by the market. This one peaked in the beginning of '04 at close to $30 US. It's now in the $17 range and we think it's worth in the low $20s. This company's fundamentals have plateaued since the beginning of the year but they certainly haven't declined with the stock price.
"I think you're going to see the normal cyclicality of tech stocks but we believe it will be cyclicality around a gradually increasing trend line. We've gone from almost no technology weight in our U.S. fund at the beginning of this year to being slightly overweight the tech sector."
* Arender's Risk Rating: Medium.
* Web Watch: www.appliedmaterials.com Arender's Edge Record (past 12 months): +1.1 per cent. Best Pick: Esprit Energy +49.3 per cent (based on price when company converted to an income trust, now known as Esprit Energy Trust). Worst Pick: Biovail (TSX:BVF) -38.9 per cent.
Disclosure: Arender holds positions in the funds in which the featured stocks are held.
