Small-cap manager Christian Cyr looks for companies with strong balance sheets and proven growth strategies. Then, capitalizing on positive momentum, he will take profits and reduce his exposure.
"Last year, we were buying into the gold and commodity sectors, not because we had a perspective on the price of natural gas or gold," says Cyr, 38, lead manager of the $472.5-millionNational Bank Small Capitalization and vice-president at Montreal-based Natcan Investment Management Inc. "We thought that these companies had solid balance sheets and could sustain losses for a long time. It was a good time to buy."
Cyr liked natural gas producers Celtic Exploration Ltd. ( CLT) and NuVista Energy Ltd. ( NVA) since they had good production growth profiles. "But they were depressed. For what reason? Because gas prices were very low."
Since then, the stocks have rebounded, even though there have been no fundamental changes in management strategy. "They have the same growth profiles. But the valuation has changed," says Cyr. "Right now, commodities are hot, but consumer names are less hot. So we're buying the latter, and selling a bit of the commodities, on momentum. That's our style."
As a rule, Cyr meets with a company's management to evaluate its growth strategy, studies the firm's long-term cash-flow prospects and analyzes conditions in the sector. Then he starts a position with a weight no greater than 125 basis points.
"Every time we take a position it's because we think the stock has the potential to double, if not triple, over a five-year period," says Cyr. "You won't achieve this every time. But when you take a position, it's because you believe the potential is there."
Among the 50 names in the fund, Cyr highlights Forzani Group ( FGL). Cyr bought in when the stock had dropped by half because buyout rumours fizzled. "We still like the management and growth profile. You just have to pick and choose the right time to buy and sell."
Should the company's strategy pan out, he will increase the holding, but limit it to about 4%. Cyr will unload a holding if a company's strategy does not unfold as originally planned, or if market expectations are too rich for his comfort. Portfolio turnover has been moderate at 58.8% in 2008.
The key, Cyr adds, is avoiding cheap stocks that only become cheaper. "At some points in the small-cap universe, you can have a value trap," he says. "I'd prefer to average up. Some of our holdings can do nicely over five-year periods."
The 4-star rated fund has been a top-quartile performer over multiple periods. It has fared particularly well over more recent periods including the past 12 months ended Sept. 30, when it returned 32.4% compared with the median 2.5% return in the Canadian Focused Small/Mid Cap Equity category.
A native of St-Jérome, Que., Cyr has been in the industry since 1995, when he graduated with a bachelor of commerce from Laval University. He began working as a sell-side research analyst at Tassé Associates, a Montreal broker. Two years later, he moved to Desjardins Securities, where he covered small-cap stocks.
In 2000, he joined Natcan as an analyst, covering industrial and consumer stocks. Since then, the two-person small-cap team has grown to four, including Serge Dépatie, Éric Dupont and Marc Lecavalier. Cyr became lead manager of National Bank Small Capitalization in 2005.
The team meets with about 800 companies a year, including many firms outside Canada. It also manages Natcan Global Small-Cap Equity Strategy, a pooled fund with about $45 million in assets.
Quantitative analysis is a key method in screening prospective firms. While the company may present an attractive strategy, the team will dig deeper into the numbers. "We ask ourselves, what kind of margins can they achieve under the scenario they're talking about?" says Cyr. "Then we check the cash flow, earnings-per-share potential and potential value if the company was privatized."
Cyr looks for one of four catalysts that could lift the stock: operational leverage through sales growth, an improving balance sheet, fiscal leverage, and potential multiple expansion. Although most stocks meet several criteria, it is rare that a stock meets all four.
TransForce Inc., ( TFI) a Montreal logistics and shipping firm, is one representative holding. "Even though the environment was tough, it had good cash flow and was paying down debt," says Cyr, noting that the company has a strong balance sheet and its stock was cheap compared to its publicly listed peers.
"The company had a good plan for the next three to five years, and they produced good results," says Cyr, adding that the stock is a core holding.
