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

FEATURED PRO: Peter Arender is a portfolio manager with Acker Finley Asset Management, a Toronto-based firm that manages the QSA series of funds.

Fund Form: The QSA Equity Fund ‘A’ has a five-year return of 8.0% compared to the group average of 7.2% and the QSA Enterprise Fund (U.S. equities) has a one-year return of 0.2% (group average 1.4%). Management Expense Ratios (MERs): QSA Equity 0.77%, QSA Enterprise 2.16%.

Arender’s Perspective: “Overall, the market is approaching what we consider to be full value, but there are some sectors and individual companies that are getting left behind. We’re finding that in technology, generally in the U.S., there are some stocks that are too expensive and that’s the most fully valued sector. We’re finding value in consumer discretionary stocks, consumer stocks in general, health care, consumer staples and some financial stocks. I wouldn’t predict that we’re about to have another 30-per-cent rally in the stock market, nor do I expect a gigantic pullback. It’s going to be a relative-value game now and that’s where guys like us earn our money.”



FIRST STAR
* General Motors (GM-NYSE)
* Recent Price: $41.88 US.
* 52-week Range: $29.75-$45.18 US.
* Snapshot: Besides its core automobile business, GM has substantial interests in digital communications, financial and insurance services, locomotives and heavy-duty automatic transmissions.
* CEO: Richard Wagoner.
* Head Office: Detroit.
* Vital Stats (U.S. dollars): Current Price/Earnings Ratio, 4.8; Revenue (last 12 mos), $189.9 billion; 5-Yr Revenue Growth, 3.8%; Earnings (last 12 mos), $2.6 billion; 5-Yr Revenue Growth, -19.9%; Market Cap, $23.48 billion; Shares Outstanding, 560.72 million; Dividend Yield, 4.8%.
* Arender’s View: “This is an unloved stock that probably no one would want to touch, largely because of the pension liabilities on their balance sheet. However, GM looks to us like it’s trading at a pretty significant discount to what we think it’s worth, which is $62. We’re starting to see some positive momentum not only in the stock’s price but, more importantly, in analyst earnings revisions that have been gradually moving higher. The fact that long-term (U.S.) interest rates have moved up significantly takes the pressure off company pension plans. They don’t need to hit the ball out of the park at all for this to be a good investment.”
* Arender’s Risk Rating: Medium.
* Web watch: www.gm.com



SECOND STAR
* King Pharmaceuticals (KG-NYSE)
* Recent Price: $16.16 US.
* 52-Week Range: $9.46-$19.42 US.
* Snapshot: King makes, markets and sells primarily branded pharmaceutical products to doctors and
hospitals.
* CEO: Jefferson Gregory.
* Head Office: Bristol, Conn.
* Vital Stats (U.S. dollars): Current Price/Earnings Ratio, 16.16; Revenue (last 12 mos), $1.3 billion; 5-Yr Revenue Growth, 58.8%; Earnings (last 12 mos), $10.6 million; 5-Yr Earnings Growth, 2.7%; Market Cap, $3.90 billion; Shares Outstanding, 241.07 million.
* Arender’s View: “This was a robust growth stock in the late 1990s, but then they ran into difficulties more recently and the market has punished them pretty substantially. While the drug sector in the U.S. seems to be trading at a price/earnings ratio of 17 to the low 20s, King is trading at a (forward) P/E of 10 or 11. We think the stock is worth mid-30s.”
* Arender’s Risk Rating: High.
* Web watch: www.kingpharma.com



THIRD STAR
* Royal Technologies (RYG-TSX)
* Recent Price: $11.79.
* 52-Week Range: $6.57-$17.50.
* Snapshot: Royal is a manufacturer of polymer-based home improvement, consumer and construction products.
* CO-CEOs: Vic De Zen, Douglas Dunsmuir.
* Head Office: Woodbridge, Ont.
* Vital Stats: Current Price/Earnings Ratio, 26.7; Revenue (last 12 mos), $1.9 billion; 5-Yr Revenue Growth, -13.3%; Earnings (last 12 mos), $41.5 million; 5-Yr Earnings Growth, -14.3%; Market Cap, $911.19 million; Shares Outstanding, 77.29 million.
* Arender’s View: “During this booming building cycle, this company has not participated due to poor management, badly timed acquisitions and so forth. What you’ve got here is a turnaround story. The stock has recently come back through a level that shows us that the market is believing what is on their balance sheet. This is a stock that, according to what its earnings are based on (and) how its balance sheet is structured, should be worth pretty much double where it is trading now. They’re also starting to restructure some of the divisions that have been causing them
problems.”
* Arender’s Risk Rating: High.
* Web watch: www.royalgrouptech.com
* Arender’s Edge Record (6 picks): +30.1%. Best Pick: Capital One (COF-NYSE) +80.1%. Worst Pick: Cigna (CI-NYSE) +1.1%.
* Disclosure: Arender owns shares in the QSA funds in which the featured stocks are held. King Pharmaceuticals is held in the Equity and Enterprise funds, GM is held in the Enterprise fund and Royal Technologies is held in the Equity Fund.