Brett Gundlock/National Post We've finished the transition from economic recovery to an earnings recovery in recent weeks, according to Gerry Brockelsby, of Marquest Asset Management

We've finished the transition from economic recovery to an earnings recovery in recent weeks, according to Gerry Brockelsby, president of Toronto-based Marquest Asset Management. Now, the great debate is about how good or bad earnings are going to be.

"The economic recovery is old news for the market," he says. "But you can drive a Mack truck through the differences in what everyone believes is possible over the next year in terms of earnings."

Mr. Brockelsby, who focuses on companies with a very healthy growth path and a strong niche in their business, is on the bullish side of that earnings expectations story.

"Nobody thought there would be a recovery, and now we have one," the manager says, noting that few thought government money given to U.S. banks via TARP would ever see the light of day.

"Investors have consistently underestimated the ability of the economy, consumers, business and the financial system to adapt," says Brockelsby.

He thinks the market will continue to underestimate the capability of earnings, which presents a great opportunity because investors can now delve down and stop worrying about whether or not they should even be in the market. Now, they can focus on what sectors and stocks they want exposure to.

"We're looking for companies where the market has not recognized the opportunity quite yet," the manager says. "At the end of the day, what we're really looking for, besides the strong growth, is some multiple revaluation."

First and foremost, he is looking for companies that have leverage on the better economy.

"The resource sector is still ripe for some great returns in the coming year or two," says Mr. Brockelsby, noting that an inability to finance has held it back. "The window really started to open up this past fall for the first time."

This will rejuvenate exploration and project development, while spurring on a whole new wave of opportunities, the manager adds.

Technology and wireless communication, in particular, is another area where Mr. Brockelsby sees great growth opportunities.

"It's really going through a sea change driven by the huge burst in data transmission from all the smartphones and devices, which is sending unprecedented levels of traffic down the wire," the manager says. "There is a whole new reinvestment phase that is going on in that sector and there are some companies that are going to benefit greatly."

While he is not throwing caution to the wind given the major hurdle a lack of lending presents, Mr. Brockelsby thinks the market has broken the back of the extremely negative view that we are in a position that we won't get out of. However, investors are still suffering the hangover of a lack of confidence, which is limiting the potential of both the stock market and the economy to do better.

"You cannot underestimate how important confidence is to investing," the manager says. "I think we are probably going to enjoy a comeback on that in the next few months. If the bankers see that companies can raise equity, then they are going to be inclined to lend. Once they start to lend more -- against a backdrop of more investing by business, spending by consumers, and confidence-building -- then you start that glorious self-reinforcing cycle that gets us to another level of economic activity."

jratner@nationalpost.com---------

BUYS

MAJOR DRILLING GROUP INTERNATIONAL INC. (MDI/ TSX).

Mr. Brockelsby bought this diversified drilling company at the beginning of the last cycle, then sold it at the top of the market.

He again added it to the portfolio in recent months because it has huge operating leverage on an improvement in the drilling cycle.

"It is a direct beneficiary of the financing cycle opening up, which has just started," the manager says. "Whenever a dollar gets financed for base metals or gold, Major Drilling sees that dollar first."

Mr. Brockelsby notes that for the company's April 30, 2010 year-end, it is expected to earn about 50¢ per share. However, he notes that consensus is calling for $1.50 the following year.

"If it goes the way with think it's going to go, we think that consensus could be conservative."

ESSENTIAL ENERGY SERVICES TRUST (ESN.UN/TSX).

The manager started buying this name in recent weeks and feels it is too cheap to ignore under $1 per share. He thinks it has a lot of potential catalysts that could move the stock higher.

"This could be an easy takeover for another player in the industry," says Mr. Brockelsby.

He notes that Essential has a market cap of roughly $50-million, but owns 50 rigs that cost $2-million each to build.

"The lesson here really is because of the financial crisis that we had over the past two years, the smaller cap stocks have been particularly ignored," the manager says.

"If the drilling cycle starts to turn here, this is a company that has huge operating leverage, no financial risk and is extremely cheap. It's probably a pretty easy double from its current stock price."

DRAGONWAVE INC. (DWI/TSX).

This longtime favourite recently pulled back after a good run earlier in the year. Mr. Brockelsby added to his position on the share price decline and has since bought more.

He points to the congestion problems data service providers are having as they shift more and more to wireless.

"DragonWave has the solution for that -- one of the best solutions," he says. "Their hardware and software clears that backlog and also helps companies manage that data."

The company is winning contracts and growing revenue yet it trades at