Value Library

The following is an excerpt from the ABC Perspective - July 2000 - Pg. 4-5

Still Finding Value . . .

The present market place continues to be a very challenging one for value investors. With technology stocks still being the major focus for many, fundamentally cheap value stocks are sitting on the sidelines waiting for their turn in the limelight again. When the time comes, ABC Funds will be ready for that encore, as we have stuck to our discipline of value investing.

Though the value investing environment remains difficult we have been able to uncover numerous value stocks, through grueling analysis and research. The following highlights four favourite ABC Funds holdings.

Canada Bread Company Ltd.
Canada Bread, 68%-owned by Maple Leaf Foods, is a leading manufacturer of value-added flour-based products. Its products are sold and distributed under popular banners such as Dempster, Tenderflake and Olivieri. Trading at a slight discount to book value with a 2.4% dividend yield, Canada Bread’s share price has drastically declined from $30 in the beginning of 1998 to a current price of $10. Signs of recovery are on the horizon with revitalized strategies and a new management team led by Roger Dickhout. Canada Bread enjoys a healthy balance sheet with a strong cash position and very little debt. We believe that Canada Bread will gradually emerge from this downturn to provide excellent long-term capital gain potential.

Co-Steel Convertible Debentures
While Co-Steel Inc. has long been an ABC value favourite, we have recently added Co-Steel’s 6½% April 30, 2007 convertible debentures to our portfolio. Priced at only $86½ and with a yield to maturity of 9.18%, we are attracted to these convertible debentures not only due to its high yield to maturity but also their overlooked convertible feature. The company is presently in a major debt reduction mode having sold off several assets and is attempting to reduce debt to 30% of its capitalization. This is improving the debentures credit worthiness and quality standing. Moreover, we would not be surprised if the company initiated a convertible debenture buy-back.

International Forest Products Limited
International Forest Products (Interfor) is one of western Canada’s largest loggers and manufacturers of solid wood products. Its current price is well below its 1999 book value of $7.11 and it is trading at only two times 1999 cash flow. With these low multiples Interfor is one of the most inexpensive stocks in its sector. The company possesses one of the best balance sheets in the forest products industry as a result of heavy debt reduction. We expect Interfor to be debt free by year-end. The company is also presently benefiting from its extensive cost reduction program instituted over the past two years. With controlling shareholder William Sauder taking a less active management role, the company’s low valuation and the huge amount of consolidation taking place in the industry, Interfor is a prime merger, privatization or takeover candidate.

Laurentian Bank of Canada
Laurentian is the seventh largest Canadian Schedule I Bank in terms of assets. In 1999, aggressive capital expenditures and fierce competition hurt profitability and the share price declined from $25.50 to $15.25. With the bank presently trading at only 0.9 times book value and a dividend yield of 4.8%, Laurentian offers excellent value. Although the share price has recovered from its lows we still see more upside. We see continued improvement as management has stabilized Laurentian’s net interest margin and its efficiency ratio. A new subsidiary, B2B Trust, was recently established to provide wholesale financial products and related services over the Internet and to position the bank as a niche player. Finally, Laurentian Bank is a prime takeover candidate under proposed changes to the regulations that currently restrict ownership in the financial services industry.

While, it is not unusual for us to highlight a few of our favourite stocks in the ABC portfolios, we do not always give an explanation of why one of our holdings has "disappeared" since the previous quarter. The following offers a short discussion as to why we liquidated some of our positions.

Newport Petroleum Corporation
Though Newport was a fundamentally sound oil stock we saw better opportunities to upgrade our holdings. With many large capitalization oil stocks trading at extraordinarily low multiples we noticed an immense amount of opportunity to invest in more liquid, under-valued stocks such as Renaissance Energy. We sold our position in Newport for a slight profit at $4.30.

Pacifica Papers Inc.
Pacifica had reached our target when we sold our position at approximately $12.00. Though the company is a possible takeover candidate, it is very illiquid and we saw better value elsewhere in the industry. Part of the proceeds allowed us to increase our position in Fletcher Challenge Canada, a more liquid, dividend-paying stock.

Ulster Petroleums Limited
This oil stock was just featured in our last quarterly publication. To quote our April ABC Perspective, "…Ulster is very cheap and is a leading takeover candidate." Barely a month later Anderson Exploration acquired the company. Before the deal was finalized, ABC sold its 750,000-share position in Ulster at $11.50. The proceeds allowed ABC to upgrade into larger, more liquid companies.

Viceroy Resource Corporation
This is a mining stock that ABC Fundamental Value holders have seen on the portfolio for quite some time. While doing some "spring cleaning" of the portfolio, we took the opportunity to sell Viceroy at a loss, as we were no longer optimistic for its future direction. This will help to offset some capital gains in the Fund.

Irwin A. Michael, CFA