Sentry on lookout for cash-flow kings

swon@globeandmail.com

What are we looking for?

What the pros are buying.

Every few months, we look at what mutual fund managers are snapping up. It's a way to get stock tips, or do research on a particular fund. Today, we look at top 10 holdings of Sentry Growth & Income Fund at sentry.ca.

More about the fund

The $146.3-million Canadian dividend and income equity fund has been run by lead manager Michael Simpson of Sentry Investments since August, 2008. The fund posted a 20.5-per-cent gain for the year ended July 31 compared with 11.7 per cent for the S&P/TSX Total Return Index.

The fund is 91-per-cent invested in North American stocks and income trusts. "We think the economy will continue to improve, but right now we see a lapse in economic growth," Mr. Simpson said. "However, we have seen very strong profit growth in the second quarter. There have been a select number of companies that generate free cash flow and have the ability to raise their dividends."

The manager said he is "cautious," but is still finding good opportunities. "We see the TSX finishing the year maybe in the [returns] range of 7 or 8 per cent and the S&P 500 below," he said.

What did we find?

A broad mix of equities ranging from a waste management firm to Canada's largest railway. Some, such as Telus Corp. and Canadian Real Estate Investment Trust, are at or close to 52-week highs.

He still sees potential in Republic Services, the second-largest U.S. waste management firm. It grew last year with the takeover of Allied Waste Industries. "What we like about the garbage or waste management industry in the United States is that there are fewer players than there were in the early '90s," he said. "This company has tremendous leverage to even modest improvements in volume and generates a lot of free cash flow." He has an 18-month target of $41 (U.S.) on the stock.

Cargojet Income Fund, which has a 50-per-cent market share in the Canadian air cargo business, has been cutting costs so it will benefit when volumes increase in the future, he said. "I like the fact that management own 26 per cent of the company." He has an 18-month target of $9 a unit on Cargojet, which will convert to a corporation by 2011.

Canadian National Railway is a good core holding, he added. "CN does a very good job of controlling costs, generating free cash flow and raising their dividends." His 18-month target on CN is $74.