Consumer stocks ready to shine ?

Although

investors are currently focused on the Canadian energy sector, consumerstocks serving the necessities of life and capable of generating a steady 15% per year earnings growth will see their time come, says Fred Pynn, a leading big-cap Canadian equity manager.

This manager has been overweight consumer-related stocks for some time. The sector has had mixed results, says Pynn. Stocks in the portfolio such as Montrealbased juvenile products and ready- to- assemble furniture manufacturer Dorel Industries Inc. and Toronto-based private label beverage maker Cott Corp. have produced disappointing results while Toronto-based entertainment company,

Alliance Atlantis Communications Inc. and Montreal-based convenience store chain,

Alimentation Couche- Tard Inc. are doing well.

In the consumer area, he prefers companies that are defensive offering staples rather than high-end items on his call that North American economic growth is slowing.

Pynn is vice-president at CalgaryBissett Investment Management, which has assets under management of more than $15-billion. His responsibilities include the Bissett Canadian Equity Fund, which has assets of $3.1-billion. His focus is on companies that produce steady earnings growth and are still reasonably valued.

Bissett is transforming this fund into a purely Canadian equity fund which will be solely Canadian by the end of the second quarter next year. “I am bearish on the U.S. dollar and with the removal of the foreign content limit in Canada, there is ample opportunity for Canadians to invest in foreign equities without going the foreign content route in a Canadian equity fund,” says Pynn.

He also continues to be overweight the Canadian financial services sector with his largest holdings: Royal Bank of Canada, Bank of Nova Scotia and Manulife Financial Corp. He is cautious on Toronto Dominion Bank as it is building a substantial U.S. exposure.

A recent buy in the consumer staple group: ❚ Sobeys Inc. (SBY/TSX). Based in Stellarton, N. B., this company operates in the food distribution business across Canada. “ The stock is more reasonably valued than rival supermarket chain Loblaw Cos. Ltd. which trades at a premium valuation.” Sobeys has a commanding presence in a number of provinces across Canada but its “ weak spot” is Ontario and this is reflected in the stock’s relative valuation. Sobeys lost to MontrealMetro Inc. in a bidding war for A&P Canada, which has supermarkets under the Dominion banner in Ontario. But, says Pynn, there will be other opportunities for Sobeys to acquire supermarket chains in Canada. Consensus earnings per share estimates are $2.91 for the fiscal year to April 2006 and $3.32 for the fiscal year to April 2007.

A consumer-related stock that Bissett sold over the summer well before the announcement that the Supreme Court decision would permit the provinces to sue the tobacco industry: ❚ Rothmans Inc. (ROC/TSX) The sale was not in anticipation of this ruling but on valuation. Toronto- based this cigarette manufacturer has been steadily increasing its dividend and its dividend payout ratio and also paid a special dividend to shareholders. “We felt that this good news was fully reflected in the stock valuation; Rothmans traded at a premium multiple to its global peers.”

From the information technology sector, Pynn is highlighting a recent addition to the portfolio: ❚

Research in Motion Ltd. (RIM/TSX)

Based in Waterloo, Ont., this company designs and makes wireless devices including the high-profile BlackBerry. He added to this stock after it declined at the end of September following investor disappointment about the company’s secondquarter results. “The momentum investors might well have been disappointed, but RIM grew sales by 58% in that quarter and earnings by 57%.” RIM signed up some 620,000 new subscribers in its second fiscal quarter, the low end of its forecast range of 620,000650,000, “but this is still most impressive.” The company is “solidly profitable, has a great balance sheet with $2-billion in cash and can settle NTP’s patent claims in the United States without impairing future growth.” From his perspective, another plus is that the company’s revenue mix will change with an increasing percentage stemming from service fees and less dependence on the sale of hardware devices. In all, RIM’s shareholder base is changing as the company matures with “the momentum players leaving the field to be replaced by managers like myself seeking solid earnings growth.” The company reports in U.S. dollars. Consensus EPS estimates are US$ 2.61 for the fiscal year to February 2006 and US$3.59 for the fiscal year to February 2007.

Pynn has been steadily trimming his holdings in the energy sector after a runup in stock prices.

Here his biggest holdings are Nexen Inc., Petro-Canada and Suncor Energy Inc. “These conservatively managed companies have low-cost, long-life reserves and will continue to produce steady volume growth.” He recently added energy producer: ❚ NuVista Energy Ltd. (NVA/TSX) Calgary-based, this company which explores for oil and natural gas mainly in eastern Alberta, was formed as part of the reorganization of Bonavista Petroleum Ltd. in July, 2003, into an energy trust and an exploration company. This exploration company has grown into a mid-cap with a market cap of $933-million. It has the same strong management team as Bonavista Energy Trust and is good at creating shareholder value by growing production from existing assets and making solid acquisitions. Consensus cash flow per share estimates are $2.25 for 2005 and $3 for 2006. Bissett Investment Management may hold positions in the securities mentioned.