Value Library

The following is an excerpt from the ABC Perspective - October 1999 - Pg. 4-5

ABC Value Favourites

As a value managers, no matter how expensive the stock or bond markets might be, we will always find undervalued securities to purchase for the ABC Funds. That really is the beauty of our fundamental value style.

We sift through many different individual securities until we find new attractive holdings and temporary anomalies. This is usually a slow and tedious process. While the stock market might be outrageously expensive, we have to blot out all the market noise and just continue on our disciplined hunt. Actually, we find this task the most challenging and exciting part of investment analysis. Our analytical role becomes, in effect, a Sherlock Holmes-type of accounting detective work.

The following are a selection of ABC value favourites which were recently purchased:

Oil and Gas debentures When oil plummeted to $10 a barrel earlier in the year a number of oil and gas debentures dropped significantly in value. These debentures included Canadian Occidental Petroleum, 6.85%, November 15, 2006, 6.45% July 11, 2007 and Crestar, 6.45%, October 1, 2007. These securities had originally been sold only 75 basis points higher than comparable Government of Canada bonds. Suddenly with the oil price drop the yield differential increased to 200-250 basis points, yielding about 7½%-7¾%. As oil rebounded to $14-15, these debentures still offered this 200-250 basis point premium. In consequence, we purchased $2 million each of these bonds for the ABC Fully Managed Fund. Presently, with oil at $24-25, we now have greater security backing these bonds and as a result, their yield premium versus Canada’s has declined to about 150 basis points.

Co-Steel Inc. is one of the largest mini-mill steel producers in the world. It also is a major recycler of ferrous and non-ferrous material. Its operations are primarily in Ontario, New Jersey, Kentucky and the United Kingdom. Co-Steel is attempting to restructure its operation after a very difficult few years. It will probably sell a number of its non-core assets such as 50%-owned Gallatin Steel and Mayer Parry Recycling to reduce its heavy debt load. With steel prices rising primarily due to a strong U.S. economy, a new CEO and a recent return to profitability, Co-Steel has excellent profit leverage for 2000 and beyond. Trading at about 80% of its $18 book value, and yielding of 2¾%, Co-Steel has no controlling shareholder and is an excellent turnaround candidate.

Westcoast Energy Inc. through its many operations operates natural gas gathering, processing, distributing and storage primarily in Western Canada and the U.S. Other operations include power generation energy service and pipeline facilities in China and Mexico. Trading near book value, about 12 times P/E, yielding over 4.6% , the company has a market value of over $3.1 billion and no controlling shareholder. Westcoast is very undervalued when compared to its peers.

Haggar Corp. is a Dallas, Texas based manufacturer of men’s apparel. Its premium and lower priced garments have a reputation for quality and fashion. Haggar clothing has a retail distribution of over 7000 merchandising outlets, with JC Penney being its largest single customer. The company expects fiscal September 31, 1999 year-end sales to be in excess of $400 million. With only 8.6million shares outstanding and a market capitalization of just over $100 million, Haggar trades at 62% of book value, has a dividend yield of 1.6% and a P/E ratio of only 11½ times.

Ampco-Pittsburgh Corporation is a specialty steel coil and pump manufacturer based in Pittsburgh, Pennsylvania. The company has an excellent balance sheet with little debt. Ampco-Pittsburgh trades at a P/E of 9 times, has a 3% dividend yield and trades at under 85% of its $15.85 book value. Under followed and very inexpensive due to its small capitalization, NYSE-stock exchange listed Ampco-Pittsburgh offers excellent earnings leverage as a capital goods provider. While management owns over 27% of the common shares, Ampco Pittsburgh might be an attractive takeover candidate.

Beazer Homes USA Inc. headquartered in Atlanta, Georgia designs, constructs and markets lower-end single family homes, primarily in the U.S. Southeast. With expected fiscal 1999 sales of over $1.3 billion, this undervalued small capitalization stock is trading at under 70% of book value and at 4.7 times P/E multiple. With the relatively strong U.S. economy and low unemployment rate, Beazer has had over 30% house closing growth in each of its first two 1999 quarters. Beazer also has a record backlog of over 3100 homes sold but not yet constructed. Management owns less than 8% of the shares and, as a result, Beazer could become an interesting merger or takeover target.

Irwin A. Michael, CFA