TOP STOCK PICKS – Sprung Somewhat Of A Contrarian

By Stuart Weinberg
June 13, 2006

TORONTO (Dow Jones) – When it comes to picking stocks, Michael Sprung isn’t interested in the flavor of month.

“To tell you the truth, we find that often our investment positions are somewhat contrarian,” he said.

Sprung, president of Sprung & Co. Investment Counsel, invests with a three-to-five-year time horizon in mind. He tries to determine if a stock’s current valuation is merited based on a company’s projected return on equity. “Basically, what you’re trying to find out is what are you paying for what you’re getting,” he said.

That question coupled with Sprung’s buy and hold philosophy accounts for the portfolio’s contrarian flavor. Lumber stocks, for instance, haven’t exactly dominated discourse on the Canadian stock market lately, yet the largest holding in the C$30-million portfolio is a lumber stock – International Forest Products Ltd. (IFP.A.T)

Sprung said he began establishing a position in International Forest, or Interfor, about a year ago. He said the strong U.S. housing market made the environment favorable for building products. In addition, demand for lumber in the U.S. was heightened due to damage wrought by by Hurricane Rita and Hurricane Katrina, he said.

Furthermore, if the softwood lumber dispute between the U.S. and Canada is resolved in Canada’s favor, Interfor could be reimbursed a significant sum for duties being held on deposit in the U.S., Sprung said. Intefor stands to gain as much as C$2 a share, or about C$100 million, he said. But even without this potential windfall, Interfor is attractive, he said. The manager is forecasting a 10% increase in return on equity for Interfor in each of the next three to five years.

Missed Run-Up And Pullback In Gold Sector

While Sprung’s investing style helps him find value in unlikely places, it sometimes results in missed opportunities.

For instance, the portfolio’s only exposure to gold during the sector’s recent run-up was Teck Cominco Ltd. (TEK.SV.B.T). “Unfortunately, gold is one area where I haven’t had significant exposure and I guess the reason for that has been it has always appeared to be ahead of what I was willing to pay,” Sprung said.

Sprung noted that gold was trading at less than US$600 an ounce just several months ago, yet gold-stock valuations suggested the metal was going to increase in a straight line for years. While that may or may not happen, gold equities surged in April and May as the price of gold shot past US$600 and briefly exceeded US$700.

While he missed the run-up, Sprung also avoided the subsequent decline, as the price of gold – and gold equities – has pulled back substantially. Gold is now trading just slightly above US$600 an ounce and Sprung said he still believes gold stocks are overvalued.

Regarding Teck Cominco, Sprung said he is confident the firm won’t overpay for Inco Ltd. (N). Teck made an unsolicited cash-and-stock bid for Inco in May. Sprung said he doesn’t own any Inco stock. “I’m sorry I don’t,” he said.

Sprung said the portfolio is slightly underweight the energy sector, noting he has been taking profits recently. One holding that he pared down was Imperial Oil Ltd. (IMO), although he said the recent pullback in energy may afford an opportunity to add back some integrated plays. Other energy holdings in the portfolio include Petro-Canada (PCZ), Talisman Energy Inc. (TLM), Pengrowth Energy Trust (PGH) and Parkland Income Fund (PKI.UN.T).

Regarding Pengrowth, Sprung said he likes the company’s balance of oil-and-gas assets, as well as its “sustainable” payout ratio. He said he also likes the firm’s production profile and the fact that its assets have a longer reserve life than the assets of other trusts with similar yields.

Sprung said Parkland Industries, which operates gas stations and convenience stores in rural areas of western Canada, is often the “only game in town.” While the firm’s profitability depends on the spread it can obtain between the retail and wholesale price of gas, it also makes a decent profit from the convenience store side of the business, he said. He said he also likes the company because it’s expanding. In the last couple of years, Parkland has gone from 200 outlets to more than 500, he said. “I think they’ll continue to do quite well,” he said.