By Gavin Adamson | Mid-January 2009

Although two small-cap money managers don’t see an economic turnaround until 2010, they say many Canadian small-cap stocks are valued cheaply and they’ve already begun buying in anticipation that the asset class will shine when the recession ends.

“When the economy turns around, small-caps should outperform,” says Martin Ferguson, manager of Mawer New Canada Fund with Calgary-based Mawer Investment Management Ltd. “But it’s not visible yet.”

Ferguson describes the recession as bathtub-shaped — meaning: it’s long and deep — and says there’s still some way to go before the situation improves.

Similarly, Sebastien Van Berkom, president of Montreal-based Van Berkom & Associates Inc. , says what he expects to be an historical 24-month recession is only halfway finished. Senti-ment can hardly get worse, he adds, and that’s a “buy” sign.

Although there may be no rush to get into small-caps, Ferguson notes that some stocks in the asset class are tightly held, illiquid and that the index can change quickly with sentiment: “Even though the market is acting poorly, I have established positions for the future.”

Here’s a look at the sectors that Ferguson and Van Berkom are overweighting:

> INDUSTRIALS. Infrastructure is a major theme for both Ferguson and Van Berkom. Among their picks are Edmonton-based consulting firm Stantec Inc. , Toronto-based construction company Bird Construction Income Fund, Mississauga, Ont.-based steel services company Russel Metals Inc. and Montreal-based engineering services firm GENIVAR Income Fund. Another is Toronto-based Marsulex Inc. , which provides sulfide cleaning services for refineries and factories and is an energy sector play more tied to infrastructure.

Ferguson also likes Woodstock, Ont.-based small trucking operator Contrans Income Fund: “Nobody likes it now, but its yield is 22%.”

> CONSUMER DISCRETIONARY. Van Berkom likes Edmonton-based easyhome Ltd. , which leases furniture and electronics to consumers; Vancouver-based Glacier Media Inc. , the publisher that bought many of Hollinger Inc.’s assets in Western Canada; and, especially, Richmond, B.C.-based Great Canadian Gaming Co. , the casino owner and operator.

Ferguson points to Transat A.T. Inc. , the Montreal-based tour operator whose valuation has tumbled, and Boucherville, Que.-based Uni-Select Inc., the used car parts distributor.

> FINANCIAL SERVICES. Both money managers have a long-time interest in Toronto-based alternative mortgage lenders Home Capital Group Inc. and Equitable Group Inc. , whose stocks are down even though they are well capitalized and efficient operators. High River, Alta.-based Western Financial Group Inc. is also a pick.

Ferguson and Van Berkom also like several small-cap real estate businesses, including Newmarket, Ont.-based Altus Group Income Fund, a real estate valuator and consultancy; Calgary-based Parkbridge Lifestyle Communities Inc. , which leases land to higher-end mobile homes and condominium operations; and RealEx Properties Corp. , also of Calgary, which owns commercial land and industrial space in Alberta and Ontario. Ferguson says RealEx is underleveraged, cheap and has quality tenants and buildings. — GAVIN ADAMSON