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Market dips provide 'good entry point'

Friday, March 28, 2008

The market turmoil has pummelled many stocks, but the better bargains are in commodity and emerging market stocks that have potential to rally nicely again, says hedge fund manager Ravi Sood.

"They have been in a bull trend for quite some time ... and those particular sectors are a lot less expensive than they were six months ago," said the president of Lawrence Asset Management Inc.

"I can't pick the bottom, but this is very good entry point," said Mr. Sood, who runs the firm's $217-million flagship Lawrence Partners Fund.

"Some emerging markets are down 20 to 30 per cent from their peak," he said. "The Indian market is down about 20 per cent so far this year."

But Mr. Sood said his favourite investment area is the energy sector, which is benefiting from rising prices. Crude oil has hit record highs lately, and yesterday closed at $107.58 (U.S.) a barrel in New York.

"The demand for oil is going to continue to be strong and grow, and the supply is going to be challenged at best," he said in an interview.

Commodities and emerging market stocks will benefit from the investment of cash now parked on the sidelines, and from the massive liquidity in the system provided the U.S. Federal Reserve Board, he said.

"Those areas have underlying fundamentals that are positive. ... If we fast forward three years, I could see both of these asset classes not only fairly valued but overvalued."

The global credit crisis that is taking a toll on stock markets is not over, but is nearing an end, he argued. "It is going to continue for several months. ...We are optimistic that equities will be significantly higher next year than they are right now."

The economic slowdown in the United States will affect global growth, but the domestic demand in emerging markets like China and India will reduce the impact of a recession there, he added.

The Lawrence Partners Fund is a concentrated portfolio with less than 30 small- to mid-capitalization Canadian stocks. The fund, which is currently closed to new clients, garnered a robust one-year return of 24.7 per cent for the year ended Feb. 29 and an average annual return of 45 per cent over two years.

"Typically, we are event-driven investors and [buy or short sell] when we believe there is a catalyst in 12 months or less, which is going to cause a rerating in the stock," he said.

Mr. Sood described his strategy as "highly opportunistic," and recently shifted 30 per cent of the fund into trades using market-neutral strategies such as risk and convertible arbitrage. "There is a lot less capital chasing those trades."

Where he is long:

CIC Energy Corp. (ELC-TSX). The British Virgin Islands-based company, which has coal mining assets in Botswana, is developing a coal-fired power station to produce electricity destined for South Africa, which is now facing a power shortage. The project comes on line around 2013, and "we believe the value of just that core electricity business is today worth over a 50-per-cent premium to the current market price," he said. He said he believes CIC could also spin out one or two coal subsidiaries into the public markets that will provide a lift to the stock. "There is huge latent value in this company in addition to the electricity project which is completely undervalued by the market." The stock yesterday closed at $17.04.

MagIndustries Corp. (MAA-TSX-VEN). The Toronto-based company has a fertilizer and forestry business in the Republic of Congo, and a power generation operation in neighbouring Democratic Republic of Congo. The company plans to take the fertilizer unit public this year, and that spinoff will unlock the value of that business, he said. His sum of the parts valuation is about $6. The stock closed yesterday at $2.04.

Where he is short:

Methanex Corp. (MX-TSX). The Vancouver-based methanol producer has seen the price for its commodity plunge to about $400 (U.S.) a tonne from a peak of $980 last year. Continued weakening demand for methanol, rising input costs such as the price of natural gas and more supply coming on the market from sources like Saudi Arabia is "going to lead to lower profitability," he added. The stock closed yesterday at $27.45.

© 2007 The Globe and Mail. All rights reserved.

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