Value Library

The following is an excerpt from the ABC Perspective - July 2002 - Pg. 4-5

We've written on this topic many times. Serious fundamental analysis and strict investment discipline have been the key to whatever success the ABC Funds have attained over the past ten years. Given the present uncertainty and volatility in the markets, it is now even more important to remain fixed on the fundamentals.

Not surprisingly, we are guided by our ABC Funds' Ten Commandments of Value Investing. These commandments are the cornerstone of our philosophy and success. They are also significant in that they serve as an important reminder of our investment management style to both the present and prospective ABC client. Value investing is what we have promised our clients in our offering memorandum and we fully intend to carry out our mandate regardless of how confusing the present marketplace may appear. Keep in mind, that as contrarians we prefer to make our purchases when the market is under duress as opposed to competing with the investment hordes during a bullish feeding frenzy. While the present investment scene appears rather murky and fraught with risk, we remain relatively optimistic and will continue to make opportunistic purchases of undervalued securities.

While we are digging deeper and longer in our laborious search for overlooked and mispriced equities, we have uncovered a few stocks, which we have recently purchased for the ABC Funds. They include Aecon Group, Canfor Corporation, E-L Financial, Hudson's Bay Company and Transat AT. Each of these investments is fundamentally attractive for one reason or another, as we will discuss.

Aecon Group Incorporated

Aecon Group is a Toronto-based construction and development services company that operates worldwide. The Company's extensive operations include construction, design and engineering services, project financing procurement and operations management. Aecon has worked on such projects as the CN Tower, the 407 Highway, the Toronto Eaton's Centre and the Pearson International Airport.

Currently trading slightly above book value, at under ten times earnings and only three and one half times cash flow, Aecon, we believe, is a classic operating margin story. With sales of approximately $1.3 billion and only about 25 million shares outstanding, if Aecon can increase its margins by even 0.1 or 0.2 of a percent, the company will significantly improve its bottom line. While generally unknown by institutional investors and brokerage analysts we expect Aecon to gradually gain recognition over the next several quarters.

Canfor Corporation

Canfor Corporation, based in Vancouver, is an integrated forest products company. Canfor primarily produces and supplies lumber and bleached kraft pulp from woodlands and facilities located in British Columbia and Alberta. The Company also produces semi-bleached and unbleached kraft pulp, bleached and unbleached kraft paper, plywood, remanufactured lumber products, hardboard paneling and a range of specialized wood products. Canfor distributes its products in Canada, the United States, the Far East and Europe from marketing offices worldwide.

As with most of our investments, Canfor is currently trading very close to book value and is yielding 2.3%. Although the Company's profitability is constrained by countervailing and anti-dumping duties imposed by the United States, strengthening pulp markets will help preserve profitability in the near-term. However, a resolution of the softwood lumber disagreement is needed before Canfor can return to historic levels of profitability. In the meantime, we believe that management made the correct decision to cut costs, improve efficiencies and curtail production. Once a stable trading arrangement with the United States is reached, Canfor has the capacity to ramp up production and generate solid earnings growth to the next peak of the cycle.

E-L Financial Corporation Limited

E-L Financial Corporation Limited is a holding company controlled by the Honourable Henry (Hal) Jackman, former Lieutenant Governor of Ontario. The main holdings of E-L Financial include a 100% interest in the Dominion of Canada General Insurance Company, a property and casualty underwriter, and an 80% interest in the Empire Life Insurance Company, a life and health underwriter. The Company also owns an investment portfolio that holds positions in publicly traded debt and equity securities and positions in closed-end investment funds. We believe that upon closer inspection, the market currently undervalues the sum of these parts.

Fundamentally, the most appropriate way to value E-L Financial should be based on the Company's book value or net asset value. Current book value is approximately $325 per share and contains almost no goodwill. However, if Dominion and Empire are valued using multiples consistent with other publicly traded insurance companies and the investment portfolio is valued at current market prices, E-L Financial has a net asset value upwards of $400 per share. Based on the 12% discount to book value and the significant discount to NAV, we believe that E-L Financial is undervalued both on an absolute and a relative basis.

Hudson's Bay Company

Founded in 1670, the Hudson's Bay Company is Canada's largest department store chain. Its two main businesses are the Bay department stores and the lower-priced Zellers stores. While the Company is attempting to cut costs and streamline operations, management is still struggling with the heavy competition from Wal-Mart Canada, Canadian Tire and Sears.

Reflective of these difficulties, Hudson's Bay is trading significantly below its book value of $30. However, its valuation is supported by a dividend yield of approximately 2.5% and an improving balance sheet. With the help of strong cash flows, debt has declined from $1.4 billion in fiscal 1999 to $457 million in fiscal 2001. As the Canadian retail environment brightens, Hudson's Bay's strong fundamentals should lead to a solid rebound in the share price.

Transat AT Incorporated

Transat is a fully integrated charter airline and international tour operator based in Montreal. With two recent financings, Transat has bolstered its balance sheet and we suspect will be able to take advantage of the disappearance of Canada 3000, Royal Airlines, Canadian Airlines and a slimmed down Air Canada. Clearly with fewer passenger seats available and stable or improving Canadian demand for air travel, we expect Transat, over the next few quarters, to obtain economies of scale and a better load factor. In combination with lower fuel prices and a stronger Canadian dollar, Transat will ultimately improve profitability and achieve earnings per share growth.

Trading at relatively low price to cash flow and earnings per share multiples, we believe Transat is relatively attractive compared to European tour companies. Further, Transat's two main operating businesses, the airline and the tour operations provide the company with a significant net asset value. Some analysts have speculated that the tour operations alone, Transat's hidden gem, are worth more than the Company's total market capitalization.

Although we cannot pinpoint the exact timing of the recovery or the potential return for these five common stocks, we are heartened by the fact that they are generally overlooked by the mainstream of investment analysts and portfolio managers. All five holdings are fundamentally solid, which provides us with great comfort in a difficult market. Any bit of positive news, including evidence of improving operational or financial results, could result in significant price appreciation.

Irwin A. Michael, CFA