(FORTUNE Magazine) – Last year, while most of the world's equity markets were sizzling hot, the Canadian market froze up and barely budged. The Toronto Stock Exchange (TSE) 300 composite index achieved only a glacial 9% total return to investors, vs. 18% for the U.S. Standard & Poor's 500-stock index. Yet Cedric Rabin and John Budden, principals of Rabin Budden Partners, investment counselors in Toronto, guided their $15-million Capital Mutual Fund up 53.7% last year, close to the top for Canadian domestic mutual funds. This year Rabin believes Canadian stocks will thaw out and make big gains; the TSE index is already up over 15%. In a recent interview with FORTUNE's Andrew Serwer, Rabin, 50, talked about where he's placing his bets. (Figures are in U.S. dollars. All stocks mentioned can be bought through U.S. brokers.)

Why should U.S. investors buy Canadian stocks? Basically because our market hasn't appreciated as much as others, so our securities aren't as expensive. Investors from around the globe are starting to realize this and money is pouring in. Domestically, too, consumers who traditionally purchased five-year certificates of deposit with rates of 12% have found their returns almost cut in half on new CDs, so they are buying stocks. Pension fund managers are moving large amounts from fixed income instruments to equities. With all this, I don't think a 30% rise in the TSE this year is unrealistic.

Will the Canadian dollar rise and bolster the foreign investor's return? No. It has recently gone from 70 cents to 75 cents, but it will probably drift back down to 72 cents by the end of the year. Nothing is really going to jack it up. The world economy is dull, and the Canadian dollar should not go up unless Canadian exports improve.

Do you like resource-based stocks? The only ones we've bought have been forest product and lumber companies. They've been on quite a run lately, even with the 15% import duty your country imposed. Price increases have offset the tax. Right now I like Rolland, a maker of fine papers in Quebec. It earned $1.49 for 1986 and the stock sells for near $14. It's cheap because of flat earnings; pulp prices are rising faster than Rolland can pass them on. But that will change soon. Also, we believe the owners are looking to merge or sell the company.

How do you select stocks? It is very important to us that we know the managers of the companies whose stock we are buying. We have a smaller business community up here and I think it's easier to become familiar with the executives. Also, we look for companies that have niches or products that will make them winners. For instance, Canadians are moving money into mutual funds as never before, perhaps as much as $75 million a day, which is a lot of money in Canada. Two mutual fund companies we like are AGF Management and Mackenzie Financial Corp. AGF has grown from nearly $285 million in assets in 1981 to almost $1.7 billion now. It earned close to 56 cents in 1986 and should earn $1 in 1987. The stock sells for $13. Mackenzie is ridiculously inexpensive at a P/E of 11 on next year's anticipated earnings of $1.20. It also has had tremendous growth, from about $375 million five years ago to $3.4 billion today. Both companies are well managed. For similar reasons I like First Marathon, a brokerage firm with a strong discount business that Canadians are just beginning to discover. Lawrence Bloomberg, the founder and C.E.O., gave it the name because he's a marathon runner. He knows his business and his competition is weak. The company earned 90 cents in 1986 and this year could make up to $1.30. First Marathon has terrific potential. The stock sells for near $14.

What about growth stocks? % I recommend Noma Industries. It manufactures a diverse line of low-tech electrical products like extension cords and industrial wiring. The owners came over from Hungary after the war and started making Christmas tree lights, very unglamorous stuff, but they have produced over 30% compound earnings growth annually for the past five years. At $15, it sells for 25 times estimated 1986 earnings of 56 cents. But it could get near $20 by year-end. Laidlaw Transportation is another true growth stock. It sells for 26 times estimated 1986 earnings of 71 cents. Laidlaw is basically in two businesses, transportation and garbage. It's the biggest waste management company in Canada.

Do you own any stocks of American subsidiaries? Two years ago American Can sold its Canadian affiliate, American Can Canada, to a local group. The new owners changed the name to Onex Packaging. For years the operation was treated like a neglected Midwestern branch office. Now Onex is filled with an entrepreneurial spirit. Sales could be over $375 million. It earned 71 cents in 1986 and should earn 90 cents this year. The stock sells for only $11, and nobody is going to come over from Japan with a better beer can.

What else looks good? We own two food and beverage stocks. Cara Operations has Swiss Chalet barbecue chicken places and Harvey's hamburger outlets. Cara is hurting because it overpaid for some acquisitions, but the C.E.O., Bernard Syron, is a very able guy who's fixing things up nicely. The company should earn nearly 60 cents this year, up from 35 cents in 1986. The stock is around $8. Scott's Hospitality operates Kentucky Fried Chicken and Holiday Inn franchises. The C.E.O. likes to buy dull businesses and make them exciting. Scott's should report earnings up to 60 cents. The stock sells for near $10.