I observe market sentiment is not where it was, but we called for an advance of gargantuan proportio...
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Gordon Pape: Top Picks Update
07/14/2014 10:00 am EST
Each January, we ask the nation’s top newsletter advisors for their favorite stocks for the new year. Now that we have reached mid-year, we are following up with some advisors whose performance was most noteworthy. Here, we speak with Gordon Pape, editor of Internet Wealth Builder.
Steven Halpern: Our guest today is Gordon Pape, editor of Internet Wealth Builder. How are you doing today, Gordon?
Gordon Pape: I’m good Steve, thanks.
Steven Halpern: Well, thank you for joining us. At the start of 2014, you selected Linamar (LNR:TSX) as your favorite stock for the new year and, since then, the shares are up over 40%. Could you give our listeners some background on the company and highlight your original rationale for recommending the shares?
Gordon Pape: Sure. Now, let me just start, Steve, by saying that I did this in my role as editor of the Internet Wealth Builder. We have several contributors to, what we call the IWB, and then I scanned through them when I got your request for a recommendation for the year and I came across this one, which came to us from one of our contributing editors, Gavin Graham.
Now, let me tell you a bit about this company, Linamar. I think probably most of our listeners have heard of Magna International (MGA). It’s the big international auto parts giant, which is based on Canada. Now you might describe Linamar as Magna’s baby cousin.
Like Magna, it was founded by an entrepreneur from Europe, but still family controlled, although the shares do trade publically on the Toronto Stock Exchange, symbol LNR. This company, Linamar, was founded in 1966 and, like Magna, it’s become a major international auto parts supplier.
It’s got factories in 12 countries around the world and it also manufactures mobile industrial equipment, things like aerial work platforms and that sort of stuff. Now, one of the reasons we really like this company is it has a very strong growth record.
Believe it or not, in a highly volatile and cyclical industry, it even managed to turn a profit during the great recession of 2008/2009, and that was saying a lot.
Now, as far as my original rationale for picking it from, literally, dozens of possible recommendations of the newsletter, basically, it’s the fact that the auto industry is going through a growth phase and the companies that supply it are going along for the ride, so we felt the stock was underpriced.
We thought it offered good opportunity for investors who were prepared to take some risk and we stressed at the time it was a volatile stock.
Steven Halpern: So, what particular developments occurred over the past six months that you would suggest might account for such strong out performance from the company?
Gordon Pape: Well, basically, it was growth, pure and simple. The momentum that we saw starting to build in 2012 and then going on to 2013 continued right on through the first quarter of 2014. We haven’t seen the second quarter results yet, but the first quarter results showed a year over year increase in revenue of 23% to over $1 billion.
Now, that was the first time the company had ever achieved that in a single quarter. They also reported earnings per share were up 64% over the same period in 2013 to $1.23 Canadian and the growth pattern we think is going to continue to be shown in the second quarter results when they come out.|pagebreak|
Steven Halpern: Now you mentioned that this is a highly cyclical industry and that the company’s been in what you consider a boom phase, but where do you believe we are in that longer-term cycle?
Gordon Pape: Well, I think we’re still in the boom phase and it could go on for a little while, but, as you noted, this industry is notoriously cyclical and there’s, I think, a significant role to be considered here in terms of what happens with interest rate.
Now, it looks like interest rates are going to start to rise next year, if not sooner, and when that happens it’s likely to put a damper on car sales, of course, many of which are financed. That, in turn, would have a negative effect on Linamar’s business.
Steven Halpern: So, for investors who followed your original recommendation and now are sitting on significant gains, would you suggest holding the shares and, equally important for new investors listening to this who may not own it, would you recommend initiating positions?
Gordon Pape: No, I wouldn’t suggest buying into the stock now. At this stage, we think the shares are starting to look a little bit pricey. They’re up about 45% since the start of the year.
The P/E ratio is still out of line at about 16.6, that’s trailing 12-month earnings, but we think that the big profits have probably been made here and we have, in fact, already advised our readers to take half the profits in the stock, take the original stake off the table and just ride on the profits that they’ve made.
Steven Halpern: Okay, so before I let you go, maybe you’d share with our listeners a name or two that you would believe that investors should consider today looking out towards the balance over the year.
Gordon Pape: Well, as you know Steve, there aren’t many bargains available in today’s market. It’s pretty hard to find them. A couple we’ve recommended recently, conservative investors might want to look at a company called AltaGas, which trades on the Toronto Exchange under the symbol (ALA).
It’s a very low-risk stock. It’s been called the ideal utility by some analysts. It offers a 3.6% yield. It has some growth potential. We have a $54 target on this stock.
Aggressive investors, people who can handle risk might want to consider a company called Lundin Mining. It trades on Toronto under the symbol (LUN). It’s a mining company so we’re talking about an out-of-favor sector here, but it is very well positioned to benefit from an expected improvement in copper and zinc prices.
We think these prices are going to continue to firm and a company like Lundin, which is very well managed, is in a good position to profit from that. We have a $7.50 target on that stock.
Steven Halpern: Well, we really appreciate you taking the time. Thanks for joining us.
Gordon Pape: You’re very welcome.
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