Analyst reveals his two favorite best buys

With the recent plunge in petroleum prices, PFB Corp. (TSX─PFB) is likely laughing all the way to the bank. That, at least, is what Don Walker might tell you.

Mr. Walker is a portfolio manager and a member of the small and mid cap investment team with Norrep Investments in Calgary. And he notes that because of oil’s sharp drop, styrene, an oil derivative, is now 50 per cent cheaper than a year ago.

For PFB, that’s crucial, since styrene is a key component of the resin-based insulation products the company makes for homes and commercial buildings. But couldn’t lower oil prices trigger a slump that might dry up demand for the company’s products? Perhaps. But Mr. Walker isn’t worried.

Demand likely to stay strong

When the economy was bad in 2009, he notes, styrene was just as cheap as it is now. Yet, PFB continued to make money. And with the housing market in both Canada and the U.S. now steady, the company should do fine, he suggests.

“I think the story of the day here is that the cost of goods is significantly lower which should generate significantly higher profits,” says Mr. Walker of the Calgary-based company.

But cheap input costs are just one reason he likes PFB. He also likes its low share price. Because no analyst follows PFB, its stock is a bargain; in fact, it now trades below its tangible book value.

And because insiders own a big chunk of the stock, their interests are aligned with those of the minority shareholders, Mr. Walker says.

Another plus? A strong balance sheet. Not only does PFB have no debt, but with $5 million in free cash, it has the wherewithal to buy back shares, hit the acquisition trail, or continue to pay out its dividend which now yields 5.5 per cent.

New products likely to spur sales

In the meantime, the new products the company is developing should continue to boost its sales.

For Mr. Walker, PFB Corp. is a best buy.

Mr. Walker also likes ADF Group Inc. (TSX─DRX), a Quebec-based fabricator of complex steel superstructures for office towers, among other buildings.

For one thing, very few new buildings have gone up in the U.S. since the market meltdown of 2008-’09. So, given that America is now riding an economic recovery, ADF can’t help but benefit from what will likely be a construction boom there, suggests Mr. Walker.

Indeed, he thinks the company is particularly well-positioned to take advantage of any building spurt in the U.S., now that it has opened a steel fabrication plant at Great Falls, Mont. — a plant that expands ADF’s fabrication capacity by 35 per cent.

Then, too, as an outfit that’s been around since 1956, ADF boasts the street smarts that come with corporate longevity.

Company knows when to bite

For example, although some of its rivals, desperate for business, have signed contracts with low profit margins, ADF has bided its time, waiting for the right deal, Mr. Walker says. And those deals may now be coming in, considering that the company’s order backlog, just $9 million two quarters ago, is now roughly eight times that.

Moreover, having been in business for close to 60 years, ADF necessarily knows how to ride out market cycles.

In addition, like PFB Corp., ADF Group is a bargain, given that its shares now trade below their tangible book value. As well, because insiders own a big chunk of the stock, their views are likely in sync with those of the minority shareholders.

Mr. Walker admits that at just one to two per cent, ADF’s dividend yield is comparatively small. But the company, he says, is a play for earnings growth, not yield. For Mr. Walker, ADF Group is also a best buy.

 

Investor’s Digest of Canada, MPL Communications Inc.
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