Martin Hubbes, chief investment officer of Toronto-based AGF Funds Inc., poses a key question for equity investors: Is the recent rebound a prelude to a prolonged bull market, or is it simply a relief rally?
"The massive advance in the equity market reflects investor expectation that there will be a full-fledged economic recovery following the recent signs of improved health." The jury is still out on this, he says, and "this is why I remain somewhat cautious."
Hubbes says that he has been "surprised at the resiliency of the U.S. economy despite the degree of leverage of the U.S. consumer and the high-profile problems of the financial services sector." There remain many problems in the U.S. and global economy that have to be addressed, he says.
The equity market "has taken heart from the fact that corporations have been posting positive earnings surprises." Financial analysts were too pessimistic in their earnings estimates in the first place, he says.
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While earnings have been less anaemic than anticipated, "this is largely due to aggressive cost-cutting on the part of many companies." A more positive signal for the equity market, he says, would be a broadly based revival in both revenue and earnings growth. "Once there is evidence that this is in the offing, I will turn more bullish."
A conservative growth manager, Hubbes looks for companies that are producing sustainable earnings/cash flow growth and yet trade at reasonable valuations relative to that growth. In all, he directly manages some $3.5 billion at AGF. They include the flagshipAGF Canadian Stock 
(the focus of this column). This fund currently has 22% in foreign content versus the mandated maximum of 49%. It holds about 90 names, mainly in companies with market capitalizations greater than $1 billion.
A "beneficiary of the general trend to cost cutting and outsourcing" that Hubbes has recently added to the portfolio is CGI Group Inc. ( GIB.A/TSX). CGI provides information technology services and business solutions to clients worldwide. "This Canadian company is a steady cash-flow producer; it has long-term contracts and a widely diversified customer base."
CGI has been successfully signing up some major new contracts and is showing strong growth in the United States -- "a trend which is likely to continue." The stock trades at 10 to 11 times the consensus earnings-per-share estimates for the fiscal year to September 2009.
A core technology holding and "one of Canada's premium growth companies" is Research in Motion Ltd. ( RIM/TSX) "which has been able to generate surprisingly good growth, despite the economic turmoil." Hubbes has been a long-time shareholder of RIM, which currently represents 4% of the portfolio.
"The challenge to the company is to maintain a reasonable level of profitability as it expands its market reach beyond the business/financial community and reduces its costs to the consumer." So far so good, says Hubbes, as RIM's sales are growing faster than its margins are shrinking. RIM trades at 17 times forward earnings.
Hubbes's largest holding in the telecom services sector is Rogers Communications Inc. ( RCI.B/TSX), which represents 2.7% of the portfolio. "The stock has fallen out of favour, as the company's growth rate has slowed and there are concerns about the new entrants into the wireless business, now that this is more imminent."
Rogers has announced "an aggressive share buyback program, which underscores the fact that the stock is ridiculously cheap," Hubbes notes. "Although it appears pricey on a price-earnings basis, its EV/EBITDA ratio (enterprise value divided by earnings before interest, taxes, depreciation and amortization) at six times forward estimates is reasonable." In all, Rogers is a good, long-term growth story, he says.
Of the Canadian banks, Hubbes continues to champion his three favourites: Toronto Dominion Bank ( TD/TSX), Bank of Nova Scotia ( BNS/TSX) and Royal Bank of Canada ( RY/TSX). "These banks have good business models that include a solid growth strategy."
Turning to the materials sector, Hubbes says that the environment for bullion is positive and that he has been refining his gold holdings. He has sold his holding in Barrick Gold Corp. ( ABX/TSX) in favour of smaller producers, "which have better long-term growth prospects and unfettered upside to bullion price increases." Barrick has "a sizeable portion of its production hedged."
Hubbes has added to Goldcorp Inc. ( G/TSX); Kinross Gold Corp ( K/TSX) and Yamana Gold Inc. ( YRI/TSX). A new addition is: IAMGOLD Corp. ( IMG/TSX) "which was trading at a more reasonable valuation than its peers." His largest and "core" gold holding is Agnico-Eagle Mines Ltd. ( AEM/TSX) "which has a series of good projects that will show growth." Agnico-Eagle represents 3.7% of the portfolio, which in total has 11.7% in gold stocks.
Hubbes's biggest foreign holding is Teva Pharmaceuticals Ltd. ( TEVA/NASDAQ). Based in Israel, this global company makes both brand-name and generic drugs. The stock sold off on concerns about U.S. President Barack Obama's pronouncements on universal health care, he says, which is when he added to his position in the stock. "Teva, as a leading generic drug manufacturer, is part of the solution to rising health care costs; it has good long-term growth prospects and is a core holding."
A U.S. stock and long-term holding that he recently sold on concerns about the impact of the economic climate on its business is UTS Technologies Corp. ( UTX/NYSE), a diversified industrial company with subsidiaries that include Otis elevators, Pratt & Whitney aircraft engines and Sikorsky helicopters.
