Covering by short sellers credited for market comeback

(Every week, Business Edge columnist Gyle Konotopetz profiles the top three stock picks of one of Canada’s most accomplished investment pros.)

FEATURED PRO: Fred Pynn is vice-president and portfolio manager with Calgary-based Bissett Investment Management (www.franklintempleton.ca/bissett).

The featured stocks are held in the Bissett Canadian Equity Fund that is managed by Pynn. The fund is down 2.65 per cent in the past 12 months (through Sept. 30) compared to the group-average drop of 6.93 per cent. Since its inception in November 2000, the fund is down 4.8 per cent.

Pynn’s Comment: “I think the selling was getting a little crazy on the negative side and now we’re seeing a comeback for the market. Before the recent rally, we thought the values of stocks were getting pretty solid. I think a big part of the huge turn for the market has been covering by the short sellers, and there are a lot of shorts in the market with more hedge funds around. You don’t want to be short in a market like this that has been beaten up so much.”

FIRST STAR
* CAE Inc. (CAE-TSX)
* Recent Price: $4.33.
* 12-Month Range: $3.25-$14.63.
* Snapshot: CAE is in the business of teaching pilots smooth flights, but a turbulent aerospace industry has
certainly given shareholders a bumpy ride. The company provides simulation and controls equipment to the civil aviation, military and marine markets. It boasts an 85-per-cent market share in full-flight simulation products.
* CEO: Derek Burney.
* Head Office: Toronto (6,000 employees).
* Vital Stats: Current Price/Earnings Ratio, 6.2; Revenue (last 12 mos), $1.2 billion; 5-Yr Revenue Growth, 6.4%; Profit (last 12 mos), $153.6 million; 5-Yr Profit Growth, 17.5%; Market Cap, $950.6 million; Shares Outstanding, 219.5 million; Dividend Yield, 2.77%.
* Pynn’s Comment: “We think it has been way over-sold. It has been downtrodden because people are concerned, and rightfully so, about the prospects for commercial aerospace.
"We think, at the end of the day, they still have a good business. The company gets about half of its revenue from military training. That business is solid and they have good prospects to generate business in that area in the short term. We think it’s got a good chance to rebound.
"This stock could easily get back to $6 or $7 and longer term it could get into the teens. The risk would be if the
commercial industry worsens and United Airlines or other airlines go bankrupt.”
* Risk Rating: High.
* Web watch: www.cae.com

SECOND STAR
* Alimentation Couche-Tard (ATD.B-TSX)
* Recent Price: $13.30.
* 12-Month Range: $7.69-$17.63.
* Snapshot: Ever wonder how many things Mac’s actually sells? According to Couche-Tard, each convenience store has 2,100 products. And Couche-Tard has 2,252 stores and counting as they tap into the U.S. Midwest. Besides Mac’s, the
cross-country network of stores includes Couche-Tard, Wink’s, Provi-Soir, Mike’s Mart, Becker’s and Daisy Mart.
* CEO: Alain Bouchard.
* Head Office: Laval, Que. (17,200 employees, including franchise workers).
* Vital Stats: Current Price/Earnings Ratio, 19.6; Revenue (last 12 mos), $2.61 billion; Profit (last 12 mos), $55.11 million; Market Cap, $742.89 million; Shares Outstanding, 55.9 million.
* Pynn’s Comment: “They pretty much dominate the Canadian (convenience store) market, so now they’re going into the U.S., concentrating in the Ohio, Indiana and Illinois area. They could be on a very nice growth track with their U.S. prospects and they’re using the Canadian side as a cash cow to provide them with the money to go into the U.S. markets.
“They’re buying stores and chains that have been mismanaged in the U.S. I guess the main risk would be execution risk in going into the U.S., but so far their track record for that has been good.
"The business is seasonal because of the increased traffic in the summer, particularly in Canada, so some people can get thrown off if they see a weaker quarter in the winter. If the stock gets hit as a result, we would just use that as a buying opportunity.”
* Risk Rating: Medium.
* Web watch: www.couche-tard.qc.ca

THIRD STAR
* Power Financial (PWF-TSX)
* Recent Price: $36.60.
* 12-Month Range: $31.05-$44.50.
* Snapshot: Power is the power play of the financial world. The management and holding company boasts more than a few big names, including North American heavyweights such as Investors Group, Mackenzie Financial, Great-West Lifeco, Great-West Life Assurance Company, Great-West Life and Annuity Insurance Company and London Life Assurance Company. It also has European holdings. Power is the fourth-largest holding in the Bissett Canadian Equity Fund with a 3.5-per-cent weighting.
* CEO: Robert Gratton.
* Head Office: Montreal (14,140 employees).
* Vital Stats: Current Price/Earnings Ratio, 14.4; Revenue (last 12 mos), $18.4 billion; 5-Yr Revenue Growth, 18.1%; Profit (last 12 mos), $919.0 million; 5-Yr Revenue Growth, 15.6%; Market Cap, $12.69 billion; Shares Outstanding, 346.9 million; Dividend Yield, 2.84%.
* Pynn’s Comment: “This stock has been quite weak and people have been very negative on the insurance sector (in which Power has major exposure). We think the selling is overdone on the insurance stocks.
“Even though the life insurers do have some bad loans on their books, which is obviously a negative, we don’t see it as that big of a concern. We’re seeing a nice bounce back in these stocks and we think they’re going to come back a lot more.”
* Risk Rating: Low.
* Web watch: www.powerfinancial.com
* Pynn’s Record: (past year): +1.4%. Best Pick: Biovail (BVF-TSX) +33.3%. Worst Pick: CAE (CAE-TSX) -44.5.
* Disclosure: Pynn says he does not directly own any of the featured stocks, but may own the funds in which they are held.