Engines of growth

Why MFC's Ted Whitehead is bullish on Canadian auto-parts makers.

Sonita Horvitch 8 September, 2010 | 6:00PM
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 Ted Whitehead, vice-president and senior portfolio manager at Toronto-based MFC Global Investment Management, is revving up his holdings in auto-parts manufacturers in the belief that the worst is over for the global auto sector.

"The fundamentals for the auto industry should improve," says Whitehead. He reasons that the industry has rationalized; there are fewer competitors and the demand should start to strengthen.

In the United States, for example, the average age of cars is 9.4 years and the average age of light trucks is 7.5 years. "This is high by historic standards." Also, U.S. auto inventories are back to their 1985 levels.

"All this augurs well for the auto-parts manufacturers," says Whitehead. Yet investors are skeptical; the stocks are out of favour and they are cheap relative to their historic norms.

 Manulife Growth Opportunities  , which Whitehead has managed for a decade, has 3% in Canadian auto-parts stocks, namely Magna International Inc. MG and Linamar Corp. LNR

The newly launched Manulife Canadian Opportunities, also being managed by Whitehead and his team, has more than 9% in auto-related stocks, including Magna and Linamar.

In all, Whitehead is responsible for $1.5 billion at MFC Global Investment Management, a subsidiary of Manulife Financial Corp. He uses proprietary quantitative models that rank stocks, as well as fundamental analysis, in making his stock selections.

Manulife Growth Opportunities, with assets of $670 million, has 84 names and is benchmarked against the BMO Small Cap Blended (Weighted) Total Return Index. The mandate requires the fund to hold at least 40% in small caps as defined by the BMO Small Cap threshold, which currently imposes a market-cap ceiling of $1.5 billion. At present, almost 50% of this fund is in small caps, according to the BMO definition.

Ted Whitehead

Cash currently represents 8% of the fund, versus the normal 2% to 5%. "There is ongoing uncertainty on the global macroeconomic front," Whitehead says. Foreign content, which can go to 30%, is around 4%. "There are a number of Canadian stocks worth buying," is how Whitehead explains his scant foreign holdings.

Manulife Growth Opportunities has sector-weighting constraints relative to the benchmark index. Currently, the two biggest weightings are 31% in materials (which includes 16% in gold stocks) and 22% in energy. These are very close to market weightings, since materials stocks represents 32% of the BMO index and energy 19%.

"Economically sensitive natural-resource stocks have corrected since April on concerns about a global slowdown," says Whitehead. "Diversification is important and I have also been looking outside these industries for opportunities, an example being the auto-parts stocks."

Magna International is a large-cap name in Manulife Growth Opportunities, which can have up to 10% in big caps. Magna recently eliminated its dual-class share structure, which, says Whitehead, is a plus.

"The stock has been showing up well in our quantitative analysis." The company reported its second-quarter 2010 results on Aug. 6 and these substantially beat analysts' estimates, says Whitehead, due to "better than expected North American operations." The company has revised its sales guidance higher for 2010 and increased its dividend.

Linamar, a small-cap holding, has been in Manulife Growth Opportunities for some time. "It manufactures a different range of parts to those made by Magna, and like Magna should benefit from the favourable industry trends," says Whitehead.

Linamar Corp. Magna International Inc.
Sept.7 close $19.19 $86.50
52-week high/low $12.00-$23.50 $42.03-$89.94
Market cap $1.2 billion $9.7 billion
Total % return 1Y*  55.2   85.1
Total % return 3Y*  -6.9    -1.2
Total % return 5Y*   3.0     1.2
*As of Sept. 7,2010
Source: Morningstar

Turning to other sectors, Whitehead notes that he has been adding to his energy holdings, with a focus on those companies that can expand their production. He recently participated in the $44.5 million bought-deal financing by the junior energy producer Sterling Resources Ltd. SLG, at $1.95 a share.

This company has assets in the UK, Romania and France. In order to minimize its capital exposure to individual projects, and increase its exploration scope, Sterling forms "beneficial" joint ventures with other companies, says Whitehead.

An example is its Breagh gas discovery project in the UK North Sea. "It has sold down its stake in this project and is using the proceeds to help fund its active drilling program." Among its peers of junior oil and gas companies, "Sterling has one of the most extensive inventories of projects."

The largest energy holding in the fund is Crew Energy Inc. CR, "which has a number of important energy plays." This stock is one of the fund's top five holdings.

Whitehead has sold his holding in PetroBakken Energy Ltd. PBN. "The company is getting to a size that makes it difficult for it to grow production."

Within the materials sector, Whitehead has not added to his base-metals holdings in recent months. "I am waiting for better macroeconomic data."

But he has made net additions to his gold holdings, "in recognition of the seasonal play in these stocks, which tend to do particularly well in August and September."

The biggest gold weighting in the fund is IAMGOLD Corp. IMG, a mid-tier company with a focus on West Africa, South America including in the Guiana Shield where its major Rosebel mine is located, and in Canada in both Ontario and Quebec. Whitehead added to his holding in this stock in May and June.

A recent addition to the fund is Guyana Goldfields Inc. GUY, which also explores for and develops gold deposits in the Guiana Shield. It is currently developing its flagship Aurora Gold Project in Guyana. "The company is expected to pour its first gold from Aurora later this year and reach full production next year."

This project has 4.6 million ounces in gold resources. The company's Aranka property also has considerable promise, says Whitehead. The stock is inexpensive relative to its peers, he adds.

Whitehead has sold his holding in Romarco Minerals Inc. R, a junior gold explorer focused on advancing its flagship project, the Haile Gold Mine in South Carolina. "The company is trading at a premium to its peer group." The stock trades at 1.4 times Romarco's net asset value versus 0.9 to 1.1 times for the group and one times NAV for Guyana Goldfields.

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Sonita Horvitch

Sonita Horvitch  

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