Too late for defence

After licking his wounds following last year’s savage bear-market mauling, Bradley Radin believes it’s better to stay the course and position Templeton Global Smaller Companies for better times.

“I’m in the camp that believes it’s too late to be defensive. You want to be on the offensive and be ready for the rebound,” says Radin, 41, executive vice-president, global equity group, at Torontobased Templeton Investment Management. “As a firm, we don’t make macroeconomic calls. But my personal view is we are roughly at the bottom and there will be ups and downs from here. Now is the time to be loading up on stocks that will make money over the next five years.”

Radin argues that many “ridiculously cheap” valuations are ripe for the picking. “They will give you a big bounce when markets do turn around.”

The fund lost 38.8% for the year ended Dec. 31, slightly ahead of the 39.7% median loss in the Global Small/Mid Cap Equity category. Last year’s poor performance is mostly attributable to market conditions. But there were also some ill-timed stock bets, as Radin took profits in some names and invested in companies that he believed showed good upside potential.

As it happened, they did the opposite. “I was too soon in certain sectors, such as consumer discretionary and non-bank financial services,” says Radin, adding that those two sectors were among the most battered. To compound matters, as small-caps received an even harsher drubbing than large-caps, the fund’s emphasis on companies with market capitalizations of less than US$2.5 billion exacerbated the pain.

One of the consumer discretionary names that he acquired is Tempur-Pedic International Inc. The maker of high-end mattresses has long benefited from pricing power and been one of the top suppliers in a highly concentrated industry.

Yet, after years of stable revenues, consumers held back in 2008 and the firm’s sales dropped precipitously. The stock has stayed around US$7, the average price that Radin paid. But he believes it could be worth $30 within several years, given its earnings power and resumption in consumer spending. “It’s a great business to be in,” says Radin, noting that the industry is not vulnerable to offshore imports, since most mattresses are manufactured in the United States.

Since February 2001, Radin has also managed the 3-star-rated Bissett International Equity. A large-cap oriented fund, it fared somewhat better than the median within the International Equity category in 2008, losing 32.6% versus 34.5% for the median.

But small-caps are Radin’s métier, and he is convinced that area will deliver strong returns once market conditions are more favourable.

One non-bank financial services firm that he’s counting on is Canaccord Capital Inc. “I got in too early, because the fourth quarter was the worst by a country mile,” admits Radin, who bought the stock last summer at $7. It has subsequently sunk to under $4.

Canaccord has long been an underwriter of Canadian resource companies and a retail broker. However, it has been hurt by the 2007 asset-backed commercialpaper crisis that took a very long time to resolve.

“It’s got a simple business, advising small resource companies and raising money. But as small firms are not raising money, it’s had a real dry patch,” says Radin, who believes Canaccord stock could be worth around $18 in better times.

Although Radin admits he’s acquired companies that are considered “high-torque,” he also maintains that he will be vindicated in due course. “Getting in too early [in these stocks] has been more painful than getting into ‘steady- Eddie’ areas which would have hurt less,” Radin says.

“But, in terms of where you will get the best bang for your buck, it’s more likely to be in the former. I’m highly confident that I’ll be able to sell some of these stocks for multiples of what they are trading at now.”

Michael Ryval is a Toronto-based financial writer.