rcm articleTORONTO (Dow Jones)--Bill Webb doesn't hold back when talking about Ruggedcom Inc. (RCM.T), calling it one of the best Canadian small-cap tech companies to come along in years.
"It's been a huge performer in this market and we still love it," said Webb, deputy chief investment officer at Gluskin Sheff + Associates Inc. (GS.T).
Ruggedcom makes communications equipment built to withstand harshenvironments. While it's expected to benefit from stepped-upinfrastructure spending in the U.S., the company was doing just finebefore U.S. President Barack Obama unveiled his US$825 billion stimuluspackage earlier this month.
Indeed, Ruggedcom was profitable even before it went public in 2006,Webb noted. The company is increasing earnings at 35-40% a year, has nodebt and trades at a price-to-earnings multiple of 14.5, he said. "Wethink the stock could easily justify a 20 multiple," Webb said. Thestock is trading at C$16.95 in Toronto Thursday, just below its 52-weekhigh of C$17.20.
While he takes an eclectic approach to investing, Webb said thereare certain benchmarks he looks for in stocks, such as high return oncapital and strong free cash flow. Confidence in management is alsocritical, he said, adding that he spends a lot of time getting to knowmanagement before, and after, investing in a company.
Webb invests in companies of all market caps, from large caps likeInternational Business Machines Corp. (IBM) to small caps likeRuggedcom. "There are stocks where it's much easier to add value whenthey're undercovered and underappreciated," he said.
Take American Italian Pasta Corp. (AIPC). The Kansas City company,the largest dry-pasta maker in the U.S., was out of favor early lastyear due to "accounting issues" that occurred under the firm's previousmanagement, Webb said. Under new management, the company has thrived,as cash-strapped families turn to less expensive foods, such as pasta,to feed their families. Webb said pasta prices are increasing, whileinput prices, such as wheat, are falling. He said the company wascovered by just one analyst when he started buying the stock in theUS$12-US$13 range five months ago. The stock is now at US$24 on NasdaqThursday, and analyst coverage has doubled to two.
Raised Cash Position, Not Shy About Shorting
Regarding the economic slowdown, Webb said, "It took us quite awhile to get into this mess, it will take us quite a while to get outof it."
In the meantime, Webb said that Gluskin, which has about C$3.7billion in assets under management, has shifted a large portion ofassets into cash. Most funds managed by Gluskin have a 25-30% cashposition, up from a more typical 5%, he said.
Another coping strategy being deployed by Gluskin is to shortstocks. The company runs seven equity hedge funds and, "unlike a lot ofother (hedge funds), we didn't forget to hedge," Webb said. Investorswho short stocks make money when the stocks decline in value.
Webb said two of the firm's hedge funds are market-neutral, meaningthey have as much short exposure as long exposure. The idea is toreduce volatility by picking winners on the long side and mitigate riskby shorting underperforming companies, Webb said.
One long-short trade entered into by the fund is long International Business Machines Corp. (IBM) and short Computer Programs & Systems Inc.(CPSI). IBM is a defensive investment due to its largerecurring-revenue base and excellent expense control, Webb said. Thestock is also reasonably valued, trading at just nine times projectedearnings, he said.
By contrast, CPSI, which furnishes information-technology systemsand services to hospitals and other health-care providers, trades at 20times projected earnings, Webb said. He said he believes CPSI isovervalued because its main client base, small and rural U.S.hospitals, faces "massive" budgetary pressures that could lead to cutsor delays in discretionary IT projects.
At of the start year, Gluskin unveiled two new funds that provideexposure to all Gluskin hedge funds. The funds are the Gluskin Sheff +Associates Multi-Strategy Fund and the Gluskin Sheff + AssociatesOpportunities Fund. The minimum investment is C$2 million.
Webb said he is very underweight bank stocks because banks aroundthe world are raising money, which is resulting in share issues thatdilute earnings. Financial-services companies that he likes includemoney-management firms CI Financial Corp. (CIX.T) and Dundee Corp. (DPMLF), as well as TMX Group Inc.(X.T), which runs the Toronto Stock Exchange. "They have a veryattractive dividend yield and are benefiting from increased equityissues," Webb said.