Volatile markets steered by U.S. market recovery

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

FEATURED PRO: Gene Vollendorf is president and CEO of Savoy Capital Management.

Savoy Capital is a Calgary-based investment firm focused on fundamental research in the Canadian market (www.savoycapital.ca).

Fund Form: The company’s flagship fund, the Gladiator LP, a long/short hedge fund, has generated a two-year return of 79.4 per cent.

Management Expense Ratio (MER): 1.5 per cent plus performance fees of 20 per cent if the fund returns above six per cent in any given year.

Vollendorf’s Perspective:

“Markets this month have been volatile. The U.S. recovery theme that has been prevalent for four months is still the dominant factor in market direction as North American markets chug upward. We have had some macro news, namely the decline of the (U.S.) greenback versus the euro and yen, which continues to cause short-term uncertainty, but the fundamental result will be a boost to multinational American companies and further weakness for Canadian exporters to the U.S. The third-quarter earnings season will likely validate the market’s summer ascent although a mild check-back could happen. Equity issuance activity has increased significantly, putting a lot of supply into the marketplace. The mood is healthy, but a pause would be healthy to re-evaluate this strong ascent.”

FIRST STAR
* Enghouse Systems Limited (ESL-TSX)
* Recent Price: $16.30
* 52-Week Range: $8.76-$16.45
* Snapshot: Enghouse is a software and services company providing spatial information management solutions to its customer base. Its strategy is to diversify operations both within and beyond its current market sector through a combination of organic and acquisition growth.
* CEO: Stephen J. Sadler
* Head Office: Markham, Ont.
* Vital Stats: Current Price/Earnings Ratio, 25.8; Revenue (last 12 mos), $29.9 million; 5-Yr Revenue Growth, -2.5%; Profit (last 12 mos), $6.4 million; 5-Yr Earnings Growth, -7.5%; Market Cap, $201.5 million; Shares Outstanding, 12.6 million.
* Vollendorf’s View: “Enghouse continues to report robust earnings growth as its latest acquisition has taken the company to a new earnings paradigm. The company is fundamentally solid with a pristine balance sheet, excellent operators and annual earnings per share growing greater than 25 per cent. The market has not recognized the rate of accelerated earnings momentum that the company is experiencing. When it does, this stock should appreciate at least 25 per cent from here.”
* Savoy’s Risk Rating: Medium
* Web Watch: www.enghouse.com

SECOND STAR
* VF Corporation (VFC-TSX)
* Recent Price: N/A (the company was in the midst of an initial public offering at press time and had not begun trading).
* Snapshot: VFC is one of the largest sub-prime lenders in the Canadian used car market. Loans are originated using Internet-based technology through dealers across Canada. The company was founded in 1994 and will start to trade publicly in October. The company has grown earnings at an annual rate of 53.0 per cent over the past three years.
* CEO: Charles Stewart.
* Head Office: Toronto, Ont.
* Vital Stats: Revenue (2002), $22.5 million; Profit (2002) $4.8 million.
* Vollendorf’s View: “VFC’s IPO (initial public offering) will provide the capital for the company’s next leg of growth. Growth opportunities include an entry into Quebec, further penetration of the Canadian car dealership network as well as market share gains due to the recent exit of the company’s largest competitor. VFC’s technology-based platform has resulted in a very low cost structure and an average return on equity of 23.0 per cent over the past two years. The company is growing earnings approximately 33 per cent per year and the stock is coming public at 10 times pro forma earnings. This stock should be well received by the market and increase 30 per cent in short order.”
* Savoy’s Risk Rating: Medium
* Web Watch: www.vfc.ca

THIRD STAR
* Alcan Aluminum (AL-TSX)
* Recent Price: $52.70
* 52-Week Range: $36.90-$53.80
* Snapshot: Alcan Aluminum is an international company with a global footprint in the aluminum and packaging industries. The company has been growing through acquisition over the past several years with an increased focus on packaging. The company differentiates from other aluminum producers through the self-generation of approximately 60 per cent of its energy needs.
* CEO: Travis Engen
* Head Office: Montreal, Que.
* Vital Stats: Current Price/Earnings Ratio, 45.8; Revenue (last 12 mos), $19.6 billion; 5-Yr Revenue Growth, 13.7%; Earnings (last 12 mos), $242.0 million; Market Cap, $16.84 billion; Revenue (last 12 mos), $19.6 billion; Shares Outstanding, 321.64 million; Dividend Yield, 1.7%.
* Vollendorf’s View: “The recently announced Pechiney acquisition will provide 15-per-cent earnings growth over the next couple years. The company’s increased size and strengthening market positions should result in a multiple expansion in line with those of other top-tier aluminum producers. This stock can appreciate 15 per cent in the near term as synergies are realized.”
* Savoy’s Risk Rating: Medium
* Web Watch: www.alcan.com
* Vollendorf’s Edge Record: +45.6%. Best Pick: Cinram International (CRW-TSX) +199.5%. Worst Pick: Speedware Corporation (SPW-TSX) -11.5%.
* Disclosure: The featured stocks are held in the Gladiator LP Fund.