Resource sector has room to grow

The energy and materials sectors have recently sold off, but fund manager Shauna Sexsmith remains a big fan and is continuing to overweight them in the Manulife Canadian Equity Fund.

"I still think it is the right long-term positioning," said the vice-president and senior portfolio manager with MFC Global Investment Management. "I think the long-term secular direction still favours energy and materials and not the financials."

She is attracted by the growth potential of the resource sectors. "I think the banks will plod along just fine and generate slow earnings growth, slow dividend growth, but I think I have better opportunities elsewhere because the banks are in a mature market and they certainly won't be taking on excess risk because we know what that came to, and so their opportunities to grow are very limited."

She noted that while the financials are trading at slightly less - on a price/earnings multiple basis - than energy measured against this year's consensus earnings estimates, the energy sector's profits are expected to grow by 62 per cent this year while the financials' forecasted profits increase is just 4.8 per cent. Looking at next year's consensus estimates, the energy sector's profits are projected to expand at almost double the pace of the financials' - yet the energy sector's P/E based on those numbers is actually less than the financials.

Besides, she noted the profit surprises in the energy sector, which forms the biggest position in the portfolio, have generally been positive and analysts have been upping their forecasts.

The equivalent statistics for the materials sector, which also plays a big role in the portfolio, are similarly impressive, she notes.

The Manulife Canadian Equity Fund, which has assets of $442-million, is down just 0.86 per cent per cent so far this year. It had a return of 6 per cent for the 12 months ended June 30, a two-year return of 14.1 per cent and a five-year return of 16.4 per cent.

In volatile, turbulent times such as the present, gold stocks garner a lot of attention from investors and Ms. Sexsmith is no exception. The portfolio of 56 stocks includes six gold issues. "We have a troubled financial system in the U.S., we have a weak U.S. economy and we have rising inflation," and a huge budgetary deficit, she said. That makes life difficult for policy makers as the various problems usually demand diametrically opposing solutions, she noted. Ms. Sexsmith thinks that the stability of the financial system will be the top priority and the problems of the weak U.S. dollar and inflation will have to wait to be resolved, which gives her reason to favour gold.

Ms. Sexsmith considers Tuesday's 6.9-per-cent selloff in Rogers Communications Inc. following the release of its latest quarterly results a buying opportunity. She noted that the company did not change its guidance for the rest of the year but said it does have a history of beating expectations and raising guidance in the second half.

"Also, they did not comment on the degree to which customers held back purchases in anticipation of the iPhone launch," she added. "So analysts have likely misread the subscriber additions." She said Rogers has great wireless margins, a very strong position in terms of market share and the best technological position. And "something that people don't always realize about Rogers is that they have humungous free cash flow," noting that Rogers is expected to generate $1.8-billion in free cash flow this year and $2.4-billion next year.

Ms. Sexsmith says she has a hard time understanding why Oilexco Inc., another pick, is not trading for more than the $16.33 at which it is currently changing hands. "It makes no sense; the stock is worth $30 based on the earnings and cash flow numbers alone," she said. She guesses that Oilexco may have gotten lumped in with other North Sea oil plays, some of which didn't work out. Unlike some of those other plays, Oilexco is doing well, with production expanding from virtually nothing a year and a half ago to 23,000 barrels a day this year and 52,000 next year. The company is expected to earn $2.10 a share this year and $4.24 next year.