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Looking for small followings to land big opportunities

Dean Trottier, 28

Occupation

Training specialist

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Portfolio

Includes shares in QHR Technologies Inc., Fortress Paper Ltd., Pethealth Inc., Hammond Power Solutions Inc., McCoy Corp. and Softchoice Corp.

A value investor and blogger

Dean Trottier has picked his own stocks from a value perspective for the past four years. His inspiration comes from Benjamin Graham's investment classic, The Intelligent Investor.

"I have been successful so far," he reports. A lot of the credit goes to his blog at

pettycash.wordpress.com. By writing down his thoughts, he is better able to remember things like past mistakes or the reasons a stock was bought.

Comments from readers also provide useful ideas, and help sharpen his analysis. "Value investors are usually open to sharing ideas as they always seem to be looking for ways to 'kill an investment thesis' they currently have," Mr. Trottier adds.

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Finding undervalued companies

He likes to invest in small companies with a small following. More importantly, they will be trading at a significant discount to intrinsic value. To estimate intrinsic value, Mr. Trottier uses one or more of six metrics, notably:

-Liquidation value (money expected from asset sales if company goes out of business).

-Replacement value (cost of replacing assets at current prices).

-Discounted cash flow (present value of projected free cash flows).

-Earnings power value (present value of cash flows less certain capital expenditures).

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-Valuation relative to peers.

-Takeover probability based on the EV/EBITDA ratio (enterprise value, or market capitalization plus debt, divided by earnings before interest, taxes, depreciation and amortization)

"What I really like about Fortress Paper is how much the market doesn't like it," Mr. Trottier says. At current market valuations, investors are "paying for only two divisions and getting two lucrative mills for free."

QHR Technologies is a niche provider of enterprise management and electronic medical record services for the health care industry. "There are strong tailwinds for the company and Canada has lots of catching up to do with the rest of the world in these areas."

Best move

During the last recession, 15 per cent of his portfolio went into Canadian Western Bank, and he had the conviction to continue adding to it as it fell in price.

Worst move

U.S. bank stocks in 2010. "I always get burned when I look outside my circle of competence."

Advice

"I would tell other investors to spend time looking for cheap stocks rather than following recommendations from 'professionals.'"

Special to The Globe and Mail

Want to share your strategies?

E-mail mccolumn@yahoo.com

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