Great Ideas From the Great White North

• ByTim Melvin, RealMoney.com Contributor
• On 2:00 pm EDT, Wednesday August 19, 2009

As part of my regular reading ritual, I like to peruse the reports and shareholder letters from the leading value managers. One of the best is the Cundill Funds. Although Peter Cundill sold the firm to Mackenzie several years ago, he still serves as chairman emeritus, and the firm remains committed to a deep-value approach. It puts out an excellent publication called the "Deep-Value Report," and I finally got around to reading the July 31 edition last night.

In the commentary section of the report, two fund managers remarked that they were getting more excited about the opportunities in the U.S. markets, particularly the large-cap markets in the United States. Although the funds are based in Canada, they invest on a global basis. Looking out over the next 10 years, the managers believe the market can offer very healthy returns for investors, and they have acted accordingly. Consist with a deep-value approach, they focus on business risk rather than market volatility, and they do not attempt to time the markets.

All of Mackenzie's funds are fairly concentrated, and its Mackenzie Cundill American Fund is particularly narrow -- the top 10 stocks account for 60% of the fund. I have always found the concentrated funds to be a great place to shop for ideas, because you know you are seeing the very best ideas, and not starter or test positions in stocks. The fund seems to be especially bullish on technology, with large positions in Microsoft , Intel and Dell .

One of the more intriguing ideas held by the fund (and profiled in the "Deep-Value Report") is Celestica . The manufacturer of electronic equipment for original equipment manufacturers (OEMs) is Canadian but trades in the U.S. on the NYSE. Back at the peak of the tech bubble, this stock traded at more than $10 a share; it now trades around $8. The company's products are found in just about every electronic device you can think of -- cell phones, gaming platforms, routers, switches, flat-panel TVs and a host of other industrial, aerospace and defense products.

Like every other company in the electronics industry, Celestica has struggled in the recent past because of slowing demand -- 22% of the company's products fall in the consumer sector, and that space has been especially weak. The company reported second-quarter revenue of $1.4 billion, down from $1.9 billion a year ago, while earnings fell to $5.3 million from $39.8 million. The company did generate $55 million of cash flow with just $14 million of capital expenditures, resulting in free cash flow of $41 million during the quarter. Guidance for the third quarter is for revenue of $1.425 billion to $1.525 billion with earnings of 11 to 17 cents a share.

There is an emerging trend away from using smaller OEMs in the electronics industry, and that favors Celestica in the future. The company's broad array of products allows it to fill a larger portion of manufacturers' needs and should allow it to gain market share. As the electronics industry becomes more and more global, Celestica's worldwide presence should help siphon market share from smaller competitors. The company now generates about one-third of its revenues from the U.S. and half from Asia.

The numbers are not as compelling as they were earlier this year -- the stock has more than tripled from its low of $2.58 in March -- but the stock is still fairly cheap. Right now, the stock trades at just 1.3 times tangible book value. The company has more than $1 billion of cash on the books, more than half the market cap, and it boasts a price-to-sales ratio of just 0.26 and an EV/EBITDA ratio of 4.1, well under the threshold of 5 that I use to identify a cheap stock. Celestica has one of the strongest balance sheets in the industry right now. Given the long-term prospects of the company, I believe the stock is cheap enough to buy. Should market volatility push the shares back under tangible book, it will be too cheap not to buy.

Warren Buffett once said that one of the secrets to being a successful investor was to read everything. The Cundill funds are not sold in the U.S., but they do invest here, and the company has been a very successful deep-value investor. Many people overlook it because it's not covered in the financial media below the Canadian border. This is a mistake -- the U.S. does not have a monopoly on smart people or good fund managers. The search for ideas that can make us money has to take us where smart people and great opportunities can be found.

Buzz up!