A growth investor on the lookout for small, undiscovered companies, Jennifer Law admits that attractively priced stocks are becoming scarce.
"I call it 'farming and harvesting.' You always put new ideas in the portfolio so they can grow for the next couple of years when your current winners get a little tired," says Law, vice-president, Canadian equities, at Toronto-based CIBC Asset Management Inc. and manager of the $120.7-millionCIBC Canadian Small Companies. "We are looking for new ideas," says Law. "In this market, though, where there is a lot of capital moving around, good companies tend to get expensive fairly quickly."
Law, who looks at both value and growth stocks, conducts qualitative analysis first, and then follows up with quantitative modelling.
"What attracts me is the business model. I ask, 'What are your products? What are the industry dynamics? What are the barriers to entry? What is the competitive landscape? How will you grow your earnings?'" Law says. "In the end, you are betting on management and have to spend time with them."
While running a 60-name fund, Law keeps a list of another 40 that look interesting. She is particularly intrigued whenever a lesser-known company comes along that has good long-term prospects.
Garda World Security Corp ( GW/TSX) is a case in point. About 18 months ago, Law met the senior executives of the firm, which provides security at several Canadian airports. She liked the company's long-term contracts and its ability to deliver on its growth potential. "You had to take a leap of faith that it could control its costs. I wasn't sure, at first. But after seeing some results, I went ahead."
Law favours stocks with lower price-earnings ratios than the overall market and higher earnings growth and strong balance sheet characteristics. She looks back three years and forward three years to determine the valuation for the company and establish a target price. "The sell discipline comes in when they hit our fair value and how soon they hit it -- in year one, or year two."
Acquired at about $5, Garda has risen to $19.40. Law, who has taken some profits, admits the stock's multiple is high. "If management can't deliver, it could become more expensive. So you take on execution risk. That's why you are betting on management. But spending more time with them gives you a sense of comfort."
A native of Chansha, China, who moved to Vancouver at age 11, Law has spent most of her career specializing in small companies. After graduating in 1993 from the University of British Columbia with a bachelor of commerce, she landed a job as a corporate finance associate at a family-owned venture capital firm called Unimet Capital Corp.
It was an assignment that introduced her to the resources sector, and the basics of putting together a business plan, finding investors and working with underwriters. "We were always looking for the next micro-cap and junior stock, and trying to find the next round of financing. It was exciting."
In 1997, Law moved to Toronto and joined Montrusco Bolton Investments Inc. She worked as an analyst on the small cap equity team. Two years later, she joined Empire Financial Group, where she was hired as manager ofEmpire Small Cap Equity.
In May 2003, Law joined TAL Global Asset Management Inc. (which was renamed in January 2006). In July of that year, she assumed the small cap fund, which had been a laggard.
In July 2003, Law was also appointed manager of the $375.8-millionCIBC Capital Appreciation. An all-cap fund, it has the same group of small and mid-cap names, but about 20% is invested in large caps such as Toronto-Dominion Bank ( TD/TSX) and Alcan Inc. ( AL/TSX).
"It's a 'best ideas' fund, since the main body of the fund is in small and mid-caps," says Law, "I use the large caps to complement what I am doing on a sector basis in the small and mid-cap world. That component also makes it somewhat more stable."
Single holdings tend to be around 1.6% of fund assets, although they can go as high as 3.5%. Annual portfolio turnover has been moderate, at 54.4% for the small-cap fund in 2004, and 47.9% for the all-cap fund.
Lately, Law has become defensive within the all-cap fund and moved into large-cap, more liquid names. "I expect volatility, and maybe a bit of sell-off like last October. I want to be on the cautious side for this year," she says.
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