Credit crunch prepares feast for value hunters

When markets were going straight up a few years ago, value investors like Wade Burton had a tough time finding any bargain-priced stocks.

"We spent five years banging our heads against the wall," says the portfolio manager with Mackenzie Cundill Investment Management.

But when the credit crunch hit last summer, everything changed. Now, there are cheap stocks everywhere. "It's awesome," Mr. Burton says.

Value investors look at measures such as price-to-earnings and price-to-book ratios to find stocks that are trading at bargain prices. A key premise of value investing is that markets often overreact to negative news, pushing stocks below their true worth. The idea is to buy the stocks when nobody else wants them, so you can profit when the market comes back to its senses.

Sound simple? It isn't. Buying stocks others are ditching requires a strong contrarian streak and loads of patience while you wait for the price to recover. Sometimes it takes years; sometimes it never happens.

With that in mind, we asked four value-oriented money managers for their top picks. As always, be sure to do your own research before investing.

Wade Burton, portfolio manager, Mackenzie Cundill Investment Management

Canfor Corp.

Few industries are more beaten up than forestry, which is why Mr. Burton likes lumber producer Canfor. Hammered by the high Canadian dollar and U.S. housing slump, the shares have tumbled about 37 per cent in the past year and trade for just 70 per cent of book value.

But Canfor has a strong balance sheet that will allow it to weather an industry shakeout and emerge in a stronger position, Mr. Burton says. About 30 per cent of industry production capacity has been shut down, and as more marginal players bite the dust lumber prices should rebound, along with Canfor's profits.

The U.S. housing bubble "allowed high-cost crappy producers to not only exist but to make money, so that kind of messed up the market," he says. "But as with all things, when you get a swing one way you're going to get a swing the other way."

Torstar Corp.

There's no denying that daily newspapers are in a tough spot as the Internet poaches readers and advertisers. But Mr. Burton thinks the punishment meted out to Torstar, publisher of the Toronto Star, has been excessive.

There's more to Torstar than its flagship daily, he says. The company owns or has interests in a broad collection of media properties: community weeklies, the Metro transit papers, Chinese-language daily Sing Tao, websites such as Workopolis.com and Toronto.com, book publisher Harlequin Enterprises and a 20-per-cent stake in CTVGlobemedia, owner of the CTV and The Globe and Mail.

Sold off piece by piece, Torstar's assets would fetch about $25 a share, he says. The stock closed yesterday at just $13.30. That's "really, really cheap," he says.

Colum McKinley, portfolio manager with Sionna Investment Managers

Jean Coutu Group Inc.

Quebec's biggest drugstore operator is still haunted by its ill-fated foray into the U.S. market. After selling its Brooks and Eckerds stores to Rite Aid Corp. in 2006, Jean Coutu now holds 250 million Rite Aid shares that have been plunging in value.

But even as most investors focus on troubles south of the border, Jean Coutu's Quebec operations are quietly generating strong returns, Mr. McKinley says. And yet the Canadian business is being valued only at about 10 times earnings, or roughly half the multiple that Shoppers Drug Mart Ltd. commands, he says

"So we think it's a stock with a fair amount of margin of safety embedded in the current price," he says.

Yellow Pages Income Fund

As more advertising moves online, shares of directory publishers have been plunging. But in the case of Yellow Pages the selloff isn't justified, Mr. McKinley says. "The reality is the Canadian market doesn't have as many competitors and has higher margins and a better growth profile," he says.

Not only is Yellow Pages the dominant player in Canada, but its online revenues are growing, thanks to initiatives including an online ad deal with Google. But what he likes most is the forward P/E of just 8 and the 11.7-per-cent distribution yield, which he considers "rock solid."

"This is an unbelievably cheap stock at these levels," he says.

Peter Mann, U.S. equity analyst with Cumberland Private Wealth Management

Pfizer Inc.

Shares of drug giant Pfizer are looking mighty sickly, hurt by a weak product pipeline, the looming patent expiration for top-selling Lipitor and assorted management stumbles.

What's to like? The shares, which have lost half their value in the past five years, trade at less than eight times this year's estimated earnings, have a free cash flow yield of more than 10 per cent and a dividend yield of 7.3 per cent.

"We try to find ideas where much of the bad news is already factored into the share price, so that if we are wrong, the downside will be minimal. We think Pfizer is a great example of this," Mr. Mann says.

The flipside is that if Pfizer announces some good news - a promising new drug, for example, or a management shakeup - the stock could jump.

UnitedHealth Group Inc.

Shares of the second-largest U.S. managed care organization are down 47 per cent this year, but at just nine times estimated 2008 earnings, the stock's a screaming bargain, Mr. Mann says.

"The biggest concern is that a Democratic government will drive for universal health care," he says. But if that happens, "margins may come down, but with 40 million uninsured Americans the outlook for growth will increase dramatically."

David Taylor, portfolio manager, Dynamic Funds

ProEx Energy Ltd.

Last fall, Mr. Taylor shifted money out of financials and into natural gas stocks when gas was cheap. Smart move: Natural gas closed yesterday at $12.51 (U.S.) per million British thermal units, up from about $6 in September.

His favourite in the sector is ProEx, a low-cost gas producer with operations in northeastern British Columbia. Given all the gas it has in the ground, "they can more than double, we think, their existing reserves and existing production and cash flow," he says.

Based on a conservative $9 gas price, he pegs ProEx's net asset value - including future production - at $28 to $30 a share. The stock closed yesterday at just $22.94.

Brookfield Properties Corp.

Mr. Taylor has been "aggressively buying" Brookfield, because the stock is trading at a hefty discount to what its real estate portfolio is worth, he says.

The current share price values Brookfield's office properties - including BCE Place in Toronto, World Financial Center in New York and Bankers Hall in Calgary - at just $350 a square foot. But the replacement cost is closer to $650 a square foot. And recently, Boston Properties paid $1,400 a square for the General Motors Building in New York.

One reason Brookfield's shares are down is that Merrill Lynch, a big tenant, has talked about moving out of the World Financial Center. But Brookfield could easily find new tenants to replace Merrill. "I just think the stock has been hit on that and I just think it's unwarranted," Mr. Taylor said.

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Credit crunch prepares feast for value hunters