When Randy Oliver rang a broker about a year ago to place a buy order for a much-maligned oil and gas company, Petrobank Energy, the broker couldn't resist putting in his two cents' worth.

"He asked me: 'Why would you ever buy that pig?' " Oliver, president of Hesperian Capital Management, chuckles in relating the story. "This stock had been totally condemned because it hadn't performed for so long. Investment people are the laziest people in the world and if the peer group thinks something stinks, they don't catch on to it when it stops stinking. When it becomes common knowledge that Petrobank is a pig, everyone is saying it's a pig and no one does any work, those are the situations where you have an opportunity to pick up some real value."

Oliver's anecdote is the story of an industry that travels in packs - and the story of Oliver's life as a fiercely independent thinker in the stock-picking game.

We're not sure if this broker's clients are broker but we do know what happened to Oliver's "pig."

File photo by Mike Sturk, Business Edge
Randy Oliver takes to his Harley Davidson when he isn't scouring the market for unloved stocks

Petrobank is one of the year's smash hits on the TSX and has helped propel Oliver to a banner year as Business Edge's Stock Picker of the Year for 2005.

Oliver prides himself in unearthing lumbering pigs and watching them run like thoroughbreds. The Calgarian started buying Petrobank (TSX:PBG) for the Norrep fund he manages in the $2 range about a year ago and continues to hold it at its recent price of $10.12 (his average price on the stock, one of the Norrep fund's largest holdings, is $2.62).

Oliver made Petrobank one of his top picks in the Edge's Pro's 3 Stars feature in February at $2.80. It turned out to be the Edge Pick of the Year with a return of 261.4 per cent. Oliver's nine Edge picks for 2005 were up 46.8 per cent through Dec. 9, edging runner-up Andrew Boland, the Peters & Company oil and gas analyst, by 0.3 per cent. Boland's biggest winner was Real Resources (TSX:RRZ), up 99.8 per cent.

How did Oliver latch on to the Petrobank story?

While Bay Street was turning up its nose on Petrobank, Oliver started digging into the oil and gas company's financials.

"I knew Petrobank was a black sheep of the industry because the stock had gone nowhere for four to five years," he says. "We usually like to get a play off the income statement where we look to see if the revenue is growing and if the stock is good value. But Petrobank was a different situation. They didn't have that. But what they did have was assets on the balance sheet that we thought were massively undervalued by the market. They had tarsands, coalbed methane and a project in Colombia.

"We started doing evaluations on the stock when it was $2 and kept coming up with value in the $5-$10 range. Then, when Teck Cominco (TSX:TEK.SV.B) bought tarsands assets (in the Fort Hills Oil Sands Project), based on what they paid, we calculated that Petrobank was worth $15 on the basis of their oilsands interests."

Oliver has been shooting out the lights for years with the Norrep funds, which focus primarily on Canadian small-cap and mid-cap stocks. The flagship Norrep fund boasts a one-year return of 38.1 per cent compared to the small-cap group average of 19.9 per cent and has a compounded annual return of 27.1 over the past five years compared to the group average of 9.8 per cent.

Besides Petrobank, which he picked twice during the year, Oliver had a second home-run pick in Major Drilling Group (TSX:MDI), which is up 68.9 per cent.

What's his secret?

"I love to dig," says Oliver, who is cruising on his Harley Davidson motorcycle when he isn't scouring the market for unloved stocks trading at bargain prices. "Every year, there are hidden treasures."

Oliver has little use for the go-go stocks that are being pumped by the big brokerage houses. His game is about beating the bushes for hot prospects that have fallen out of favour and fallen out of bed.

"I often go to the Sedar files (Canadian public securities files at www.sedar.com). I'll take a day a month and go through one letter - there might be 100 companies under 'A.' I'll look at the latest quarterly report of a company and if it's interesting, I'll look a little more. Nine times out of ten, I'll say, 'no, that sucks.' And I'll walk away from it."

Oliver says he's currently finding the most value in a select few industrial, mining and technology stocks (for his latest top picks, see Pro's 3 Stars on Page 12).

Yet, Canada's most famous and most infamous tech stock, Nortel Networks (TSX:NT), remains in his doghouse while many analysts and fund managers have begun pounding the table on the company.

"I've hated Nortel, even during the 10 years before it exploded (to $124.50 in 2000)," says Oliver, who established Hesperian Capital in 1995 after working as a large-cap portfolio manager at Mutual Life of Canada. "This company has never had higher than a 10-per-cent return on equity, it has never had an accelerated growth rate, even in the boom years, and it's never had earnings over a dollar per share.

"We're a very value-oriented firm. We look for stocks with a relatively low P/E (price/earnings ratio) and a relatively high return on equity. We use several other factors, but 70 per cent of our decision is based on those two factors.

We look at well-managed companies and I love it when there's no research done by the brokerage firms. Then, we can be the leaders on it. It's as simple as that."

Oliver avoids analyst recommendations like a plague unless he sees a whack of sell recommendations that sometimes motivate him to take a second look.

"We pay a lot of attention to the information (in an analyst research report) and virtually no attention to the recommendations. The guys do write up well how the company operates and what impacts them and that sort of thing, but virtually every brokerage report simply says it's a buy and it's going to trade 15 per cent higher. They're trying to generate commissions and that sort of thing."

During a banner year in Canada in which the S&P/TSX Composite Index has returned about 20 per cent on the strength of energy and mining stocks and a year in which the major indices in the U.S. have recorded only marginal gains, seven of the Edge's pros who made six or more picks either beat or matched the S&P/TSX.

For the second straight year, Strategic Analysis Corp. president Ross Healy placed third. His large caps returned 35.8 per cent. Other top performers were Jean-Francois Tardif of Sprott Asset Management (+33 per cent), oil and gas specialist Peter Linder of DeltaOne Capital Partners (+25.6 per cent), David Burrows of Rockwater Asset Management (+22 per cent), and oil and gas specialist Josef Schachter of Schachter Asset Management (+19.1 per cent). Schachter was the Edge's Stock Picker of the Year the previous two years. Overall, the experts' picks returned 12.7 per cent, down from last year's performance of +14.4 per cent.

* SAGE WORDS: "I could always remember a balance sheet better than a name or a face."

- Randy Oliver, in a 2003 Edge interview.

(Gyle Konotopetz can be reached at gyle@businessedge.ca)