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Reasons not to hang up on RIM

AGF's Martin Hubbes cites rapid growth of smart-phone market.

Sonita Horvitch 3 November, 2010 | 6:00PM
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 Martin Hubbes, chief investment officer of AGF Investments Inc., says that despite naysayers, he remains a strong supporter of the Canadian wireless-device maker Research in Motion Ltd. RIM.

A conservative growth manager, Hubbes recently added to RIM in his flagship AGF Canadian Stock. "The stock pulled back to below $50 and I used the opportunity to boost the holding to 3% of the portfolio, which is roughly half the weighting that I have in technology."

RIM's BlackBerry smart phone is losing some market share to rivals such as Apple and Google's Android smart-phone platform. Even so, "the company is still growing at a good pace," says Hubbes. "The reason is that the whole smart-phone market is expanding so rapidly," he says, "in contrast to many industries where it is tough to find growth."

In RIM's past quarter to Aug. 28, the company produced a 31% increase in revenue versus the same quarter last year. Also, says Hubbes, RIM shipped 12.1 million BlackBerry devices in the quarter and now has more than 50 million subscribers. Although RIM shaved its profit margins to address the consumer market, "these are still satisfactory, due to the considerable economies of scale in the manufacturing side of its business."

Finally, Hubbes notes, the stock "is cheap, a lot of bad news has been discounted." RIM trades at around eight times 2010 earnings-per-share (EPS) estimates. "Compare this valuation to that of utility stocks, which are currently trading at around 20 times EPS estimates," he says. "The utilities have less than half of RIM's growth but do offer more predictability." Investors in RIM have to remain vigilant, he says. "The industry can change in a nanosecond."

Regarding the equity market as a whole, Hubbes considers that it is likely to move sideways for a while. The high economic growth in emerging economies is being offset by the slow growth and fiscal challenges of the mature economies, he says. "In this environment, it is necessary to target those industries that still offer some growth."

At AGF, Hubbes directly manages $4.5 billion, including AGF Canadian Stock, which has assets of $2 billion. The foreign content of this fund is about 16%.

Hubbes looks for companies that are producing sustainable growth in earnings and cash flow and yet trade at reasonable valuations. AGF Canadian Stock has about 80 names.

A company that offers "slow, steady growth" in the technology sector is CGI Group Inc. GIB.A. An information-technology and business-services company, CGI is "an outsourcing story." The company is winning contracts globally," says Hubbes. While the stock has had a good run, "there is further upside." It trades at a price/earnings multiple of about 14 times, "which is not expensive."

CGI Group Inc. Research in Motion Ltd.
Nov. 2 close $15.77 $56.44
52-week high/low $12.11-$16.80 $44.94-$78.78
Market cap $4.4 billion $29.3 billion
Total % return 1Y* 21.0 -6.2
Total % return 3Y* 15.0 -21.9
Total % return 5Y* 13.2 18.6
*As of Nov. 2,2010
Source: Morningstar

Hubbes continues to like the growth prospects of "select companies" in the global health-care sector, which constitutes about 7% of the portfolio. Here, a long-time favourite and currently the fund's biggest weighting in this sector is TEVA Pharmaceutical Industries Ltd. TEVA at 2.3%.

Most of TEVA's products are generic, says Hubbes. One of its major branded drugs is Copaxone, for the treatment of multiple sclerosis. Its patent expires in 2014, he notes. "But concerns about this are reflected in the stock price," says Hubbes. "TEVA is an exceptionally well run company."

Hubbes has reduced his holding in the pharmacy-benefit-management company Express Scripts Inc. ESRX to 1.3% from 2%. "The stock has had a good run. I still like its prospects, but the easier money has been made."

He also likes SXC Health Solutions Corp. SXC, which is in a similar business. "This company is growing like a weed." The stock's valuation reflects expectations of high growth, and the company has been able to meet them so far. "But this stock is not without its risks."

AGF Canadian Stock has a "small position" in each of two global pharmaceutical companies: GlaxoSmithKline Inc. GSK and Sanofi-Aventis SA SNY. "These companies are steady long-term earnings growers. They face only modest patent expirations, and pay dividends."

Martin Hubbes

The financial-services sector represents 25% of AGF Canadian Stock. Bank stocks tend to be expensive, says Hubbes. "They are unlikely to lead the market, but their businesses are in good shape." A plus is that investors can anticipate dividend increases, "now that the rules on capital required have been clarified."

Hubbes' three ongoing favourites are Toronto-Dominion Bank TD, Bank of Nova Scotia BNS and Royal Bank of Canada RY. They are in the top 10 holdings in AGF Canadian Stock.

He has established a position in Canadian Imperial Bank of Commerce CM, which is "the cheapest of the Big Five banks." CIBC, says Hubbes, has refocused on its profitable, stable businesses such as retail and commercial banking. It has downplayed its higher-risk activities, he says, and "has, to use a baseball analogy, avoided swinging for the fence."

Of the insurers, Hubbes reports that he has taken some money off the table in Manulife Financial Corp. MFC, "though it remains a 1.5% holding in the fund." The company, which suffered from its exposure to the equity market during the market crash, has "repaired its balance sheet and reassessed the risks associated with some of its products."

Like other insurers, Manulife's own investment portfolio has currently been affected by declining interest rates, Hubbes says. "It is having to roll over its bonds at lower rates."

There could, he says, continue to be some uncertainty surrounding the company's earnings in the next few quarters. But "investors should not lose sight of Manulife's strong global franchise."

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Sonita Horvitch

Sonita Horvitch  

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