I500: Dynamic’s Cecilia Mo’s top stock picks

Suncor is back.

 

Top picks from the pros

Cecilia Mo

Vice-president and Portfolio Manager, Dynamic Funds

“I’m a value portfolio manager,” says Cecilia Mo matter-of-factly. “So I look at valuation first.” That process begins with looking at cash flow and earnings power and then seeing what multiples people are paying for those earnings. She then looks at a company’s return on invested capital; the higher the ROIC, she says, the higher multiple the stock deserves. The stocks she buys must have good earnings, cash flow and ROIC growth, but its multiples should be depressed. “Then the multiples will get better over time,” she says. Typically, the companies she finds have fallen out of favour for a reason, usually because people aren’t keen on a sector or some issue has temporarily hurt the business. The Lipper award–winning fund manager runs a number of funds, including the Dynamic Value Fund of Canada, which has a four-star Morningstar rating and an 11.4% 10-year annualized return.

Mo’s Picks

1| Suncor Energy (TSX: SU)

Market cap: $44 bil | P/E: 9.6

It’s taken some time, but Suncor’s management have become disciplined allocators of capital, says Mo. During the oilsands boom, Canada’s biggest energy company spent money as if oil prices would always be north of $100. But rising labour and material costs, and falling energy prices, forced it to become more “return-focused,” she says. The company has cancelled under-accretive projects like the Voyager upgrader. Currently, its return on capital is around 4%, but she thinks it can rise close to 9%. It is trading at a discount at a 4.5 times EV/EBITDA multiple; Mo thinks it should be closer to 5.5 times. “The capital return strategy is becoming more shareholder-friendly,” she says.

2| Macdonald Dettwiler & Associates (TSX: MDA)

Market cap: $2.5 bil | P/E: 22.4

Macdonald Dettwiler & AssociatesThis aerospace company based in Richmond, B.C., has a long history of acquisitions, but Mo is most excited by its 2012 purchase of Space Systems/Loral. The California subsidiary manufactures the satellites that send TV signals into homes. The deal gives MDA a better presence in the U.S. commercial and defence sectors. Earnings power is being underestimated, says Mo, because Canadians don’t understand the commercial satellite space. “It’s very promising in the U.S.,” she explains. Earnings may be squeezed this year because of the US$875-million deal, but she expects earnings growth of 16% in 2014. “They have a lot of cash flow coming,” she says.

3| Intact Financial (TSX: IFC)

Market cap: $8.3 bil | P/E: 12.6

If you’re looking for a cheap financial company, consider this Toronto-based auto and home insurance operation. It’s trading at less than 10 times earnings, partly because of the Ontario government’s desire to slash auto insurance rates by 15%. Intact’s earnings-per-share growth has also been hurt by the low-yielding fixed-income market, as it invests premiums in short-term bonds. Mo doesn’t think premiums will get cut, however, and there’s plenty of upside. The auto insurance market is littered with smaller players, so there will be opportunities to buy rivals. The company should see earnings per share and book value each grow by 12% a year, she says.

Mo’s Funds:

Dynamic Value Fund of Canada

$1.8 Billion Assets under management

11.8% 10-year annualized return

Inception Date: 1957

Dynamic Canadian Value Class

13% 10-year annualized return

$477 Million Assets under management

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