Brett Gundlock, National Post Files Alan Wicks, manager of the Manulife Canadian Value fund, is underweight gold companies, since they "trade at very high P/E and price/cash flow multiples, don't pay much of a dividend, and with ...

Strong job numbers out of both Canada and the United States are among the recent signs that we are moving along the right path, according to Alan Wicks, portfolio manager at MFC Global Investment Management. The bigger questions, however, are how much of this economic strength is the result of exceptionally low interest rates, and how much is due to fiscal stimulus and government spending to create jobs.

"The difficult challenge central banks and governments are going to have is how to pull back on all this stimulus without causing the world economies to take a step back," says Wicks. "It is going to be a delicate balance. We are in this recovery mode, but it is going to be choppy."

He notes the significance of the U.S. dollar rally and gold's decline after Dubai's debt troubles were revealed as evidence that the greenback won't go down forever. Similarly, U.S. interest rates will eventually rise.

The fund is about 8% or 9% underweight energy and significantly underweight the materials sector, particularly in golds.

"We just find it difficult to invest in gold companies that trade at very high P/E and price/cash flow multiples, don't pay much of a dividend, and with profitability that is anemic at best."

Wicks is also underweight Canadian banks, suggesting that while they have proven to be great companies, their share prices appear to have gotten ahead of themselves. He sees a better opportunity in the insurance space.

The manager is overweight the consumer staples, consumer discretionary and telecommunications sectors.

Wicks and his team use a comprehensive, proprietary model to develop a unique equity risk premium for each company assessed. From this calculation, they develop buy and sell targets for each stock in the portfolio, allowing them to identify names where the market appears to have mispriced risk. The fund typically holds between 40 and 50 stocks.

While 100% of the portfolio was trading below the manager's buy target in March, these days that number is around 30%. Given the huge rally since this year's market lows, Wicks feels some profit taking is inevitable.

"Valuations are not as cheap as what they were. That's helping to increase the volatility."

The market will need more good news if it is to rise further, but the reality is that there will be some bad news, he adds.

"The good news is that quarterly earnings were quite strong for most companies in Canada and the United States in terms of beating expectations," says Wicks. "Not only on the bottom line but on the top line, which is very important because a lot of companies have been beating expectations by reducing costs and laying off people."

If companies start to show more top-line growth, they should be able to start re-hiring, which is the key to getting everything going again, the manager adds. "Having the economy not only sustain itself, but start to grow on its own again."

jratner@nationalpost.com

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BUYS

INDUSTRIAL ALLIANCE INSURANCE AND FINANCIAL SERVICES INC. (IAG/TSX)

Wicks sees a good opportunity in this insurance company at these levels, noting that it has been beaten up along with its peers.

"They don't have quite the same equity exposure as some companies out there," he says. "They've already adjusted their reserves for interest rates -- one of the big concerns with insurance companies.

"With the drop in equity markets people are concerned that insurance companies as a whole have to come good on their segregated fund guarantees," the manager adds. "Different reserves have to be increased depending on what the S&P 500 or TSX trades at."

Wicks thinks a lot of these reserve issues are fully reflected in Canadian insurance names, which is why he likes Industrial Alliance.

WESTJET AIRLINES LTD. (WJA/TSX)

The manager says WestJet is looking attractive these days despite the airline's recent challenges in terms of profitability.

"They do have a cost advantage relative to their most significant competitor -- Air Canada, which is always a good thing," says Wicks. "They are adding routes, developing an alliance with Southwest Airlines in the United States, and as the Canadian dollar has strengthened, they've added more routes down south as people take advantage of the stronger currency."

He also noted WestJet's international agreement with KLM, the fact that it is still generating 10% return on equity at the bottom of the cycle, and will have a significant amount of operating leverage when things turn around.

YELLOW PAGES INCOME FUND (YLO.UN/TSX)

Wicks sees a good risk-reward opportunity for this stock.

"This is a name that has been beaten up given the weakness in the overall economy," he says. "They are trying to refocus the business -- do more online as opposed to just the straight directory business, which is going to be in decline."

However, the manager feels this negative factor is already reflected in the stock around $5.

"People are starting to price this as if the business isn't going to be around in three years, and we don't necessarily think that is the case."

While Yellow Pages said it would maintain its 80¢ annual distribution until the end of 2010, Wicks expects it will need to be cut as 2011 approaches.

SELL

SUNCOR ENERGY INC. (SU/TSX)

The manager has reduced his weighting in Suncor, while redeploying some of that money into Husky Energy Inc.

"The risk-reward was less than we were seeing in some other names," he says.

In addition to Suncor's strong move, Wicks also benefited from owning Petro-Canada, which Suncor bought earlier this year.

Suncor shares have risen more than 50% in 2009.

The manager also sold some of his Talisman Energy Inc. and bought Nexen Inc.

"Nexen can generate a much higher return on equity, trades at a much lower P/E multiple, and again that risk-reward ratio for us is much better than it is for Talisman."

Talisman is up approximately 45% year-to-date.