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UPDATE December 9, 2019

President’s Portfolio

NYSE Sold: Bank of America (BAC)

Purchase Price $6.76
Initial Sell Target $38.74
Sale Price $33.75 (28.6%)
Current Price $33.67
Well, this is unusual. Normally at this time of year, we are sending out releases about stocks we have purchased. Not here. Benj has decided to play defence and take 28.6 percent of the holding of Bank of America off the table. The stock has had a tremendous run since October and is up almost 400 percent since the purchase in 2011. The dividend has added a tasteful topping.
Why sell? Well, BAC swelled to about 16.5 percent of the portfolio. That is a piece, to be sure. Add in FUNC and FUSB, and US banks accounted for about 38 percent of the whole enchilada. It feels like taking some off the table is being prudent. Normally, we don’t sell winners at this time of year, but in this case, rebalancing the portfolio trumps tax deferral.
There is one other key reason. We do believe that a nasty recession is in the offing, along with a stock market blow-off. It would amaze us if it did not happen before the end of 2021, perhaps much earlier. If it does occur, banks should get hit. The Canadian banks have been predicting a harsher year in 2020. That is a firm possibility.
The Initial Sell Target remains very reasonable from this angle. If we are lucky and it is reached in the short term, wonderful. Perhaps it might take years—not so delightful. Either way, mucho dinero remains on the table.

UPDATE September 8, 2019

Vice-President’s Portfolio

OTC Sold: Spark New Zealand (SPKKY)

Purchase Price $7.79
Initial Sell Range $12.00–$15.00
Sale Price $14.79
Shares Sold 2,000 (100%)
Current Price $14.78
Ben considered selling Spark New Zealand last December after it rallied to over $14.50, but he decided to hold, defer taxation and collect another dividend. The trigger has been pulled now that another dividend is in the bag and the shares are at a 52-week peak — and near the top end of the sell target range.
The company’s latest results came out in late August, and the stock responded strongly. While the market liked the numbers, we were a little less impressed. The top line was down slightly, the payout ratio remains over 100 percent of earnings and cash flow, and debt jumped significantly.
Still, net income was up 12 percent, the FY2019 guidance was met, and next year the dividend and EBITDAI are expected to increase, while capex should fall. Next year will also be the first full year at the helm for the new CEO, who took over in July. We doubt this leadership change will make much of a difference in corporate strategy.
Behind the headlines, the telecom’s valuations are creeping higher—as are the valuations in New Zealand’s stock market. Though the organization is not overtly expensive, it is richer than it has been for the time we have been owners. Though the combination of growing debt, high valuations and a lofty payout ratio have compelled us to stick to the sell target, the company’s outlook isn’t a bad reason to stick around, either.
A final consideration is the state of the global economy. The bull market is the longest on record, debt levels are high across the board, and the yield curve has inverted across many countries — or gone deeper into negative territory for those in Europe and Japan. Add on the US–China trade war, Brexit uncertainty and the limited ability of central banks to help in the next downturn, and it looks like a toxic brew. As a result, it seems prudent to take some money off the table and hold more cash.
One item of note is that Spark trades as an ADR on the OTC market in the US. Volumes are modest and only a tiny fraction of the shares traded daily in Auckland. Your broker may warn you that bid and ask quotes are “indications” rather than firm quotes. As such, the use of a limit order is doubly important.
This brings to a close our remarkable investing foray into New Zealand. Purchased as New Zealand Telecom in December 2010, it became something of a Kiwi money tree, generating a lovely stream of dividends. Then it spun off Chorus, which begat more payouts.
During the time held, the duo churned out a total of $15,942, more than the entire purchase price. Tack on the capital gains of $21,796 and the total return works out to 242 percent. It’s a reminder of the way boring utilities can produce exiting returns for patient investors.

UPDATE March 21, 2019

Vice-President’s Portfolio

OTC Sold: Chorus (CHRYY)

Purchase Price Spun off from New Zealand Telecom
Initial Sell Range $20.00–$22.00
Sale Price $19.49
Shares Sold 400 (100%)
Current Price $19.25
Chorus was slated to be covered in the upcoming quarterly next month. During the review process, it appeared that the stock should be sold. It was unloaded at $19.49, just shy of the $20.00–$22.00 target range set after it was spun off from New Zealand Telecom in 2011.
(Due to a technical issue, this update is being sent to you a day late — our apologies for that.)
Chorus has been on a tear; year to date, it is up 24 percent after a 42 percent surge in 2018. The latest results were not so impressive. Fixed-line and broadband connections were down slightly, as were the top and bottom lines.
On the encouraging side, fibre connections grew to a new record, customer satisfaction improved markedly and the dividend increased by nearly 6 percent.
Though the earnings report was lacklustre, there were a few news items that helped drive the stock. The first centred around a NZ$800 million investment from Crown Infrastructure Partners, a government-funded agency whose goal is to implement the government’s objective of improving access to broadband and mobile in rural areas.
Crown’s investment in Chorus could grow to NZ$1.3 billion by 2023. The funds will be 57 percent equity and 43 percent debt.
The second news item was a timeline on the transition to a regulated utility (i.e., more regulated). The Commerce Commission has deferred the regulatory period until January 2022. This is important because, during the three-year transition, Chorus can be more aggressive at raising prices. After January 2022, many charges will be capped and other price increases will be more difficult to implement or be tied to metrics such as CPI.
As management navigates this transition to 2022, they will focus on connecting more fibre customers, growing broadband and funding the fibre expansion. The outlook for the second half of the corporation’s FY2019 calls for continuing fibre uptake. Longer term, management expects to return to modest EBITDA growth.
Which brings us to why Chorus was sold. Higher EBITDA will be imperative, given that the organization’s net debt to EBITDA ratio is at a lofty 3.8 and the dividend payout is over 200 percent. Chorus must grow significantly to fit its current dividend and debt profile. Looking at valuation, in 2013, CHRYY traded at book, 0.6 times sales, 3.7 times earnings and 1.5 times cash flow. Today it trades at 5 times book, 3.8 times sales, 61 times earnings and 7 times cash flow.
These metrics indicate a pricey stock, one that incorporates a lot of optimism about the future. That could come to fruition, but something could go wrong, and we know that the market can be brutal when a company does not meet high expectations. This suggested that selling into market strength was the prudent course of action.
One item of note is that the Chorus ADR trades on the OTC pink sheets in the US. While the trade went off without a hitch, volumes in this market are low and only a tiny fraction of the shares traded daily in Auckland. Your broker may warn you that bid and ask quotes are “indications” rather than firm quotes. As such, the use of a limit order is doubly important.

UPDATE September 21, 2018

Vice-President’s Portfolio

TSX Sold: ATS Automation Tooling (ATA)

Purchase Price $7.38
Initial Sell Range $19.00–$24.00
Shares Sold 1,200
Sale Price $24.08
Current Price $24.19
We are in the midst of culling the lists of potential acquisitions during the upcoming buying season. Though markets appear to be at extended levels, there should be some juicy morsels for acquisition.
Meantime, there is also action on the sales front. ATA jumped on the acquisition of KMW Konstruktion, Maschinen & Werkzeugbaua in a move to improve its position in the trendy and growing Electric Vehicle market. KMW is a German based supplier of custom systems and test equipment which has been in business since 1993.
It has 68 employees and last year its revenues were €14 million with EBITDA margins of 20 percent. ATS will pay €19.5 million and the deal is expected to close over the coming months. The market and analysts have responded positively to this news. Consensus estimates now rank the stock as a strong buy with price targets between $25 and $28.
Despite the popularity, it is difficult to assess how much more upside momentum is left. Since the M&A was announced the shares have faced tough upside resistance above $24.
ATA has high valuations and it is now trading above the top end of its VPP sell range and nearly two bucks over the initial sell target in the PP. From here it is a stretch to argue for raising the sell range materially higher despite all the positivity around the acquisition of KMW.
Another reason to let go of this position is good-ol’ insider activity. Over the last year no insiders have bought shares and just over $4.4 million in stock has been sold by management. Sometimes when it is just one insider buying or selling we pay it little mind, but when it is multiple insiders on the move we take note. In this case, seven individuals have been taking profits.
Insiders often reveal the most realistic appraisal of a company’s prospects while analysts fall under the spell of a stock price spitting out new 52-week highs.
Weighing all of this, Ben and Phil decided to bid adieu to ATS at $24.08. Another such innovative manufacturer in Canada will be hard to find.

UPDATE September 6, 2018

President’s Portfolio

TSX Sold: ATS Automation Tooling (ATA)

Purchase Price $7.06
Initial Sell Target $22.24
Sale Price $22.24 (67%)
Current Price $21.97
After being held for over a decade, about two-thirds of the position of ATS Automation has been sold. While the time frame has been long by many metrics, the gain of 215 percent in a very tax-efficient manner is quite delightful. This also takes about 8.4 percent of the portfolio off the table in one fell swoop.
ATS’s quarterly results were excellent. Revenues jumped 14 percent to $300 million from one year ago. Net income was up to $16.7 million from $11.5 million. And looking forward, the order backlog was up 16 percent to a record $789 million.
CEO Andrew Hider stated, “Our first-quarter performance featured improvements in our financial value drivers including year-over-year growth in Order Bookings, revenues and margin expansion. We finished the quarter with record Order Backlog and have continued to advance the ATS Business Model.
Our balance sheet is strong and we are well positioned to execute on our value creation strategy: Build, Grow and Expand, to drive long-term shareholder value.”
Obviously because 33 percent of the position was not sold, the conviction is that the stock price of ATS will increase further. At the same time, it seemed to be a prudent time to sell a mittfull as in the past this company has found it difficult to run on all cylinders for long.
We are in the midst of searching for stocks to buy before the year is up. Some interesting opportunities do appear to be in the pipeline. When purchasing though, we are mindful that the bull market is among the longest in history and it is very difficult to know when it will end. This sale secures some gains before further investments are made.

UPDATE April 10, 2018

President’s Portfolio

Nasdaq Sold: First United Corp. (FUNC)

First Purchase Price $7.57
Rights Purchase Price $11.93
Avg. Purchase Price $8.44
Initial Sell Target $21.24
Sale Price $21.70 (3%)
FUNC has recently been on a tear. The results reported last Wednesday were excellent by all metrics. The bottom line was chubby and the book value rose to $15.74.
And as Carissa L. Rodeheaver, Chairman, President and Chief Executive Officer pointed out, the bank is well positioned to profit from this higher interest rate environment. They paid the first dividend since 2010 and at $0.09 it was generous.
The plan is to continue to disburse it quarterly. Worth noting is that after a corporation commences a dividend, it usually outpaces the stock market for three years.
While the sale at $21.70 was nicely above the Initial Sell Target of $21.24, only 33 percent went out the door. Normally a minimum of 50 percent of a position is sold.
Given that Benj is looking to sell assets in this stock market environment, will it prove foolhardy? Perhaps. One key reason to hold is the possibility, note the word "possibility", that FUNC will be included in the Russell 2000. To qualify, the bank needs a market cap of $150 million.
It closed a few hairs above that level on Friday. The list of new members should be released on June 8 with the rebalancing on June 22. If First United is added, we expect it to go higher as index funds will be forced to own it based on its inclusion. We are not suggesting that this is a logical process —simply one that we might profit from.
Some people were curious about us not selling at the Initial Sell Target. When a stock has tremendous momentum, it can be wise to wait for a higher price. This almost always works out for us, albeit recently with Flex it did not. Unfortunately, that is the way the cookie crumbles.
As you likely know, the PP has remained heavily weighted to U.S. financials even after some huge sales in this sector. This lightens the load a bit more.
Worth noting is that US financials seem to have some sort of catastrophe every decade or so. While not predicting anything tomorrow or even the next day, it is nice to be taking more money off the table here.

UPDATE January 14, 2018

Vice-President’s Portfolio

Nasdaq Sold: Century Aluminum (CENX)

Purchase Price $3.57
Sell Target Range $21.00–$26.00
Shares Sold 700 (35%)
Sale Price $22.24
Current Price $21.74
CENX rallied 129 percent in 2017 and 523 percent since it was purchased in early 2016. Ben and Phil decided to take some profits with the stock now firmly within the sell range.
Selling about a third of the position recovers the initial capital roughly two times over but keeps a majority of the holding in play. Hopefully this blends the best of both worlds and we are able to push out the remainder later at a higher price.
Century is no longer the bargain it was when acquired. The valuation is not extreme, but it is getting up there. Since early 2016 the price to book ratio has expanded to 2.4 from 0.4 and price to sales ratio is 1.2 versus 0.2. A long running bull market at a record level was another consideration.
There are also a handful of issues where the outcomes are up in the air. The first is ongoing litigation with utility Santee Cooper in South Carolina. It is likely CENX will lose this longwinded battle, which could put the operation at Mt Holly in jeopardy.
The second is how Hawesville’s second line restart will proceed. If it encounters problems, volumes and margins may be impacted. Third, management has started implementing an Enterprise Resource Planning (ERP) system, one of our least favourite operational moves as they frequently go over budget and take longer to implement than planned.
On the macro side, Iceland’s political landscape is messy. A strange coalition between the Greens, the agrarian focused Progressive Party, and the centre-right Independence Party was formed in December after a snap election. It is tough to assess what policies this three-headed government will pursue or even where there is mutual ground and that could lead to instability as they only control 33 of 63 seats.
Iceland has had an ongoing debate about what to do with their geothermal energy. Do they use it to build and maintain smelters... or do they lay undersea cables to Europe? How the new government will address this tug of war is unknown.
So why not sell more or all of it? It is unusual that we part with this small a percentage. The counter macro development is in the US. There they continue to push forward with anti-dumping duties against China and the WTO case versus that country remains ongoing.
Though the legal front could take years, the US may move to impose anti-dumping duties between 97 and 162 percent as soon as Feb 23. This prospect is lifting the stock, but it could surge if a high tariff becomes a reality.
Seasonally, the stock often does well through April and the previous time Phil played this cycle he sold at various prices between $20–$30. The hope is that this happens again. Revenue is up nicely, the net losses have morphed into profits, and the balance sheet is in good shape.
The price of aluminum is robust, so better earnings are in the pipeline. The market likely anticipates this however so we shall temper our optimism. Many things have to go right to see this over $25 or $30.

UPDATE October 23, 2017

Vice-President’s Portfolio

NYSE Sold: Diana Shipping (DSX)

Avg. Purchase Price $5.39
Sell Target Range $18.50–$21.50
Shares Sold 3,600 (100%)
Sale Price $4.10
Current Price $4.07
Earlier this year, the sales of Iteris and Norsat resulted in capital gains for the VPP. To reduce this tax burden Ben and Phil decided to take a tax loss on Diana Shipping. The intention however is to buy this back later in the year.
The timing to crystallize this loss appears reasonable. In the upcoming quarter — due out in late November — we anticipate two factors to weigh heavily on the company.
The first is the implosion of DSX’s containership subsidiary, Diana Containerships (DCIX). This year, DCIX shares have fallen 99.98 percent — no, that is not a typo!
Its market cap is now a sliver over $1 million, and it has engaged in four reverse splits, which hasn’t helped. It plans to sell seven of its eleven vessels for up to $104 million to pay its debt holders — DSX is one of the largest, having lent $82.6 million earlier this year.
The ships to be sold and the final price are still to be determined, but as it’s a fire sale, they will go for below book value. It’s hard to estimate by how much, but our back-of-the-napkin math suggests the difference will be roughly $50 million.
For DSX, recovering some capital is positive, but the deal is tenuous, and even if completed, the proceeds will not be sufficient to pay off all its debts to Diana. Therefore, DSX will continue to have funds tied up in a broken entity.
The second issue surrounds the sale of a ship called the Melite. In July, the Melite ran aground, was deemed unsalvageable, and was sold as scrap for $2.5 million versus a book value of $23.6 million.
Management anticipates recovering $14 million via insurance but this still leaves a $7.1 million difference, which will likely take the form of a non-cash write-off. Though this won’t be realized in the upcoming quarterly results, clarity around the insurance claim and the eventual magnitude of the charge should be forthcoming.
The macro outlook for the industry is evolving. After years of high levels of demolition and reduced ship building, the trend has reversed in 2017. Over the summer of 2017 more new ships were ordered globally than in all of 2016 and scrapping has fallen sharply in response to a recovery in the Baltic Dry Index (BDI) to a three-year high. Chinese imports of iron ore are also at a multi-year high.
Though the BDI should head higher over time, it has risen quickly, and a period of consolidation, especially during the seasonally weak winter months, is to be expected. Most of DSX’s ships are rented out on long term contracts and are not tied to the BDI spot market. Therefore, little of the index’s rally will be captured in the near term.
DSX remains attractive to us as its insiders are the largest owners, and the shipper remains well managed versus its peers. It appears to present significant upside from the current price. As mentioned, we hope to be owners of this one again soon.

UPDATE September 5, 2017

President’s Portfolio

Nasdaq Sold: Magic Software (MGIC)

Purchase Price $1.81
Initial Sell Target $7.84
First Sale Price $7.09 (61%)
Second Sale Price $8.85 (39%)
Current Price $8.95
Magic Software joined the portfolio smack dab at the end of 2007. That made it the third-oldest holding in the portfolio, albeit not quite as ancient as Flextronics and ATS Automation.
It has added geographic diversification to the PP, given its base in Israel, along with a nice dividend. Revenues have been growing beautifully for years, the bottom line has been black on black and debt was virtually non-existent until 2016.
But a takeover led the company to take on a reasonable amount of debt, nothing outlandish to be sure. There is no question that the stock price can increase further.
So, why sell?
Well, the price is nicely above the Initial Sell Target. The bull market in the United States is the longest in history. Valuations appear stretched and October has presented negative surprises in the past.
And who knows what Le Donald will do next?
This also reduces the US side of the portfolio, which as you likely know has been one of our goals.
Thus, this has worked out very well. Now to get back to work figuring out what to buy before the end of 2018. With any luck, there will be some dandies.

UPDATE August 15, 2017

President’s Portfolio

NYSE Sold: CDI Corp. (CDI)

Purchase Price $10.01
Initial Sell Target $30.74
Sale Price $8.25 (100%)
Current Price $8.25
As mentioned in our previous email, we doubted that a higher takeover offer would emerge given the nature of the company’s situation and the merger agreement’s “no-shop” provision, which bars soliciting other suitors.
So, rather than waiting for the deal to close in the third quarter — assuming that it does — Benj decided to cash in now.
That means paying a minor expense at the discount broker and missing out on a higher offer if one appears. Given that the stock traded as high as $8.32 today, the possibility of a better bid seems somewhat more likely.
That said, it isn’t particularly unusual for the price of companies being taken to flit over the bid price on speculation.
The sale reduces exposure to the USD, as was stated as a priority a number of times over the past year. Indeed, the greenback has fallen versus the loonie. The PP is better positioned for this given that the last two purchases were Canadian and after the sale of BOCH. It would be nice for the process to continue but it will not be forced.
CDI’s quarterly results reported last week showed that revenues tumbled from $227 million to $170 million last year. The loss was $7.9 million. Nothing pretty here. Perhaps it does not change the thinking of the suitor, which are affiliates of AE Industrial Partners, LLC. The new owners will have plenty of work to do.

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