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UPDATE February 3, 2017
Nasdaq CM Sold: Iteris (ITI)
Iteris has turned into a near picture-perfect Contra holding, albeit with ups and downs. Accounting issues surfaced in 2013, which resulted in a revolving door at the CFO suite; the former CEO left unexpectedly; and the stock was range bound for years. Yet its strong balance sheet, valuations, unique technology, and the growth potential of its markets eventually won out.
After an earlier sale we wrote, “Curious subscribers may wonder why we didn’t sell the entire position... We certainly see a rationale for jettisoning the entire stake, but feel that the odds of the stock going higher are fairly good and it is worth sticking around for that possibility.”
This strategy has paid off and the enterprise may continue to do well. Momentum is strong and that is often a good near-term sign. Benj emailed the rest of the gang today and joked, “Wow, a nice gain from yesterday. Quite something. Tomorrow $6 easy.”
Seasonality is on ITI’s side for the next month or so. In addition, a big revenue increase is expected when results are reported next week, although the bottom line number is far murkier. And today, investment banker Craig-Hallum initiated coverage with a target of $9.
So why sell? First of all, Iteris gave Benj what we hoped for and more. ITI’s valuations are high and the market as a whole appears expensive. The enterprise has not reported a profit since March 2014. Management would say that is because they are building out their agricultural division, but they have been saying that for over a year. A very bright future is priced in. The question is: Has the stock price gotten ahead of itself?
Also with Le Donald in the seat of power, one might consider whether one of his mistakes could send the stock market tumbling. That suggests paying more attention to playing defence.
Another goal is to reduce the percentage of the portfolio on the American side, which was greater than 70 percent in the January issue. This is one step in a process of rebalancing the PP.
At the end of the day, a total return on the investment of 213 percent is pleasing. That is a hefty number indeed. Ben decided to hold off on selling the remaining position in the VP portfolio until quarterly results come out on February 9. It remains to be seen if the hefty can get heftier.
UPDATE September 6, 2016
Nasdaq CM Sold: Iteris (ITI)
Today Ben joined Benj by reducing his stake in Iteris. In all, 5,000 of the 7,000 shares were sold. Since the President’s Portfolio sale on July 18, the enterprise has issued its hyped and much anticipated quarterly numbers. While the revenue hit management’s projection and the backlog was a record, the company still wasn’t able to turn a profit. In the aftermath of the earnings release the stock drifted lower but in the past week has found its legs again and is driving higher.
Though the agriculture division remains small, its growth prospects appear encouraging and should produce 80 percent gross margins according to management. In the meantime, the transportation side of the business continues to accelerate with more product launches and backlog growth.
Though we are happy with the sales and think sticking to sell targets is prudent, curious subscribers may wonder why we didn’t sell the entire position in either portfolio. We certainly see a rational for jettisoning the entire stake, but feel that the odds of the stock going higher are fairly good and it is worth sticking around for that possibility. It is near the $4.00 mark, the share price momentum is strong, and the business is moving forward solidly under the CEO who arrived less than a year ago. Therefore, we thought it worthwhile to keep some skin in the game.
UPDATE July 18, 2016
Nasdaq CM Sold: Iteris (ITI)
Sometimes in this game one is unlucky and sometimes Lady Luck shines down. Benj was playing this company by the book and offered half his position at the Initial Sell Target of $3.49 when the stock price jumped. The stock hit $3.4899. An apparent “darn.” The offer was then raised slightly and when the stock swooned, it was cancelled.
The reason for the stock price hop was that Relm Wireless reported that they had taken a 5.5 percent stake in the company and was seeking board representation. This disclosure led to takeover or merger speculation although that is questionable given the smaller size of Relm.
Good news was in the pipeline on Thursday evening. Iteris announced that they expected first quarter revenue to be 28–33 percent higher than last year, accompanied by improved income. The stock zoomed on Friday touching $3.85, with trading volume of 1.47 million shares. That compares with the normal daily tally over the last three months of less than 45,000. Meanwhile, half the position exited the portfolio at the $3.70 level.
Iteris was one of the companies featured in the most recent Contra quarterly, which you have likely received. So except for the above, not much to say. It will become clearer when ITI reports results on August 4.
UPDATE January 6, 2016
TSX Sold: St Andrew Goldfields (SAS)
Today Ben decided to sell his stake in St Andrew Goldfields (SAS). As mentioned in mid-November, Kirkland Lake Gold (KGI) and SAS signed a definitive merger agreement whereby KGI would acquire all the shares of SAS. Since that time we’ve been watching the price of gold along with the arbitrage spread and have got to know Kirkland.
Recently the price of gold has rallied in light of weak economic data out of China and geopolitical tensions in Korea and the Middle East. Today these factors culminated in a strong bid for gold and miners, which pushed up volumes and prices. In addition to this improvement, the arbitrage spread in the exchange ratio between Kirkland and St Andrew has narrowed.
While it’s nice to have a couple decent days for the gold market for a change, the overarching factor came down to our assessment of Kirkland. The enterprise is by no means a troubled company. It operates in the geopolitically safe waters of Canada, has decent gold grades, is diversifying its resource base with the SAS acquisition, and should benefit from operational synergies given the proximity to KGI’s properties. The larger market cap should also increase trading volumes, institutional interest, analyst coverage, and may make for a more attractive takeover target if there is future industry consolidation.
This being said, there appear to be more attractive candidates in the mining space and we do have a few concerns about the company specifically. Kirkland’s balance sheet has more debt than we like to see, and unlike SAS and Alacer, it has a net debt position. Operationally, they also struggle on the cost side and are fairly expensive on a price to production basis. In addition, the Macassa Mine Complex is in need of significant capex within the next few years — likely in the hundreds of millions of dollars — to extend the mine life. Finally, insider activity has been mixed over the last year and it appears that much of the executive team at SAS will move on once the transaction is complete.
So rather than swap our shares, the decision was to sell at a decent profit and take a closer look at some alternatives in the gold sector.
UPDATE July 21, 2015
Nasdaq Sold: Fidelity Southern (LION)
Aren’t we noisy all of a sudden? This kind of roar is delightful indeed.
Fidelity was played by the book: initial sell target and sale price being one and the same. The gain kicks in at 464 percent, plus dividends. Oh, and a fat currency gain thrown in. Sweet!
As you know, the PP has focused on banks since the recession. Before this sale, they were about 30 percent of the portfolio, not including GE. That is a huge percentage, but being divided between four banks still allowed for what was perceived at this end as reasonable diversification. The sale of LION, the largest holding in the PP swoops approximately 13.5 percent of the portfolio off the table and reduces the exposure to the USD, which may or may not be a good thing in the short-term. However, as powerful as the greenback appears these days, at some point one could conclude that America will have to wrestle with their debt and deficit.
Fidelity is firing on all cylinders. The results announced last week showed a record bottom line. Revenue is up, the book value climbed and the dividend is a tidy dime per quarter. Some investors might want to wait until the date of record of August 3 to collect the next dividend. We decided that now was a reasonable time to jump ship.
Yes, this is definitely a fascinating volatile time: the craziness in Greece and China, commodities tumbling and the Canadian economy languishing. Meanwhile stock markets are largely shrugging off the dangers. We can see why. Whatever will happen, it is nice to bank (yes, pun intended!) a huge gain and move on.
UPDATE July 16, 2015
TSX Sold: Com Dev (CDV)
Today Com Dev finally left the portfolio, no IIROC mishap, poor timing on a company release, or (knock on wood) any other shenanigans this time. We hope that a situation like the one experienced in June when we first tried to sell the company does not happen again.
Aside from leaving the portfolio not much has changed with Com Dev since the last update. The only noteworthy news item is the filing of a preliminary prospectus for the exactEarth spinoff. To this end the weight of factors suggests to us that it is a good time to sell. Though the spinoff could boost the stock and the company is running on the momentum associated with an exciting growth story, the balance sheet is not what it was, the earnings have deteriorated, valuations are high, and seasonality suggests it is a good time to sell. In addition, it has hit the top end of the sell target. However, as stated in the first sell note, an investor could make an argument for waiting until a solid plan for rolling out an IPO emerges.
UPDATE May 15, 2015
Nasdaq Sold: Integrated Silicon Solution (ISSI)
We were wrong, but that is okay. On March 16, after the first bid arrived from a consortium of Chinese investors, we wrote, “The probability of a competing offer emerging is very low. The agreement calls for a stiff termination break fee of $19.2 million if either side backs out and Integrated’s ability to solicit other bids is limited.”
Cypress Semiconductor ignored us. They have made a non-binding offer, pending due diligence. They have asked ISSI for a Confidentiality Agreement that they can sign and then get on with their work. They have also decided to go public with their proposal so that shareholders will have more information. For those interested in the letter, it can be found here:
The beauty of a Cypress takeover rather than a Chinese consortium is that since this is an American company, it should be more palatable to American regulators, although the fact that it would give CY about 60 percent of the SRAM market means it would not be a slam dunk. Also, with the Chinese element shuttled to the sidelines, it should be tastier to the Taiwanese, where Integrated also operates.
A major question one has to ask: Is this the beginning of a bidding war? It could be. How high might it go? Tough to say. But there is already a nice piece of change between the $19.75 offer from Cypress (did we mention non-binding?) and our $20.14 exit price. And further of course from the consortiums $19.25 bid. If would not be a complete surprise though to see a further bid by one of the parties at $20.25. Maybe higher, and then maybe another. But if Cypress does get to access the books and does not like what they see, the stock could plip down to the $19.25 range quite swiftly.
At this point we do not know how the management of ISSI will respond to the new situation. That would be a delightful piece of the puzzle to have in our little hands. But que sera sera at this point given that we sold.
Our Initial Sell Target on ISSI was $18.89. There have certainly been times over the past seven years when we felt that goal was too lofty and considered dumping. Fortunately we did not, following our penchant that less activity is more. As an aside, insiders were selling quite a bit below that level recently.
In some ways, this sale is transformative for the portfolio. It takes about 9.5 percent off the table, a big chunk to be sure. It also reduces the exposure to the American dollar. That side of the portfolio has increased handily over the past few years to a record level as Benj was not afraid of the greenback dropping much against the loonie. In fact, we have noticed that it has appreciated quite a bit. While it can go further, it obviously has less distance to travel.
At the end of the day, the gain works out to about 250 percent, not counting dividends or the currency gain. What beautiful spring weather!
UPDATE October 13, 2014
NYSE MKT Sold: Alpha Pro Tech (APT)
As the saying goes, “Price is what you pay, value is what you get.” In August, Alpha could have been purchased for a bit over $2. On Friday, it went well over $7.00. Trading volume on Friday was nearly 39 million shares. The float is around 14.5 million. An “ebola mania”? An Alpha contagion? Yeah, that seems fair. What is a realistic value for APT? Well, based on fundamentals, likely not as high as $7.00. In fact, less than two weeks ago, we were happy with the $3.34 received.
Now, if one looks at human psychology, hmmm, that is another kettle of fish altogether. The death of a patient on U.S. soil changed the narrative drastically. The sad truth is that the hardships of people in Africa receives only vague sympathy from comfortable North Americans, but when the spectre of the threat hits close to home, pure fear emerges. And as we well know, fear and greed are extremely potent emotions affecting stock prices.
That said, cold logic indicates the danger is real. Though slow moving and far less contagious than other viral diseases, the Ebola outbreak is expanding quickly, the number of cases roughly doubling every three weeks. Though effectively halted in Nigeria, it is entrenched in three West African capital cities. As long as air travel is allowed to the region, there is bound to be the occasional “export.” Countries with adequate health care infrastructure have a good, albeit not perfect probability to isolate and contain such infections. But one shudders to imagine the consequences if the virus should somehow get loose among the teeming millions of Calcutta, Jakarta or Karachi.
We do not have a specific price target in mind for the remainder of our position in APT because the maximum scope of the Ebola epidemic is yet to be revealed. The news that a nurse in Dallas has tested positive will fan the flames in the immediate term. Thus, to a degree we are playing it by ear. What we are convinced of is that once the infection rate drops, the speculative hysteria will dissipate. This sale helps to ensure that what is good news for the world is not bad news for the portfolio.
UPDATE October 1, 2014
NYSE MKT Sold: Alpha Pro Tech (APT)
If one wants to talk about a game being postulated and then played by the book, this one is it.
Alpha was picked up for the portfolio as 2011 was turning into 2012. This is what we wrote when the company was purchased. “But over time, the business has generally been modestly profitable, with the odd period of losses. And then, when a perceived health catastrophe might clout, the stock price jumps. This seems to happen with some regularity every few years or so.”
Guess what? It is happening. And it is quite possible that Ebola will be more serious than H1N1 or SARS. Certainly this outbreak appears to be gaining momentum and huge sums of money and personnel are being deployed to combat it. Will the dispatch of 3,000 U.S. troops to Africa be able to stem the tide or will it ultimately cause it to spread further? One thing for sure, the virus will be much harder to stop this time as it has moved from rural to urban areas.
Since the beginning of August, the stock has been leaping ahead. Though we believe the major reason for this is Ebola, the financials at APT have been excellent. In the most recent quarter, revenues jumped 9.8 percent, SG&A declined from 78.3 percent of gross profit to 73.2 percent, and net income grew 88.8 percent, resulting in a 7.3 percent net profit margin.
Within the company’s building products segment, sales improved 5.1 percent and the cheaper version of its synthetic roof underlay saw sales increase fourfold. Going forward management remains encouraged by the housing recovery in the United States.
In our talks last month with two top management people, our expectations were tempered for this quarter. As was pointed out, a major problem for the countries combating the virus is that they do not have much money to throw at the disease. However now that richer nations are getting drawn into the battle, more dollars are certainly being spent. That could easily mean revenues at APT could bounce as they did in 2009, although we do not think that will be the case when results are reported in November. Perhaps the quarter afterwards. If sales do fly, that would likely strongly boost the share price. It is for that scenario that 42 percent of the original position is being held. As we all know, there are no guarantees. Are long-term subscribers tired of hearing that?
The sale of Yahoo! last month combined with Alpha means a chunk of change has been taken out of the portfolio. Certainly that has diminished some risk given the rise of markets over the past five years or so, which increases the possibility that they will drop. That is not a prediction that markets will tank, but it is nice to have some gains safely in hand. In this case, Alpha worked out to a 285 percent profit.
UPDATE September 22, 2014
Nasdaq Sold: Yahoo! (YHOO)
In October 2013, when the first tranche of Alibaba was sold, we wrote, “A key factor to the potential future stock price is the IPO of Alibaba, which looked like it would happen in Hong Kong but now appears to be U.S. bound. What will be the valuation? Tough to reckon but certainly a heap assuming it goes ahead. And since Yahoo still owns 24 percent of this enterprise even after selling half of its stake last year for $7.1 billion, it means that the company’s benefit could tune in at 10 figures. Alibaba is leaping in size and very profitable.”
As the dog and pony show did the rounds, BABA increased in value. Friday it jumped out of the gate and managed to finish miles better than the $68 dollars at which Yahoo! sold 121 million of their shares — 38 percent better in fact at almost $93.
As BABA jumped, Yahoo! slipped in price. Speculation that a buyout of AOL was on CEO Marissa Mayer’s possibility list turned investors sour. The company has stated it will return half of the windfall to shareholders, either as a buyback, a dividend, or some combination of the two.
We continue to question just how good a job Mayer is doing. While many have fallen in love with the woman at the helm, the sullying of the balance sheet since she came aboard is worrisome from this angle. When she arrived, there was virtually no long term debt, while today it chimes in at about $1.2 billion. While the cash hoard that will arrive from the Alibaba sale could be used to pay this down, it is probable that will not be the case. Maybe there will be more acquisitions at sky high valuations, as was the case with Tumblr. In addition, YHOO has swallowed so many enterprises over the past couple of years, it is difficult to see how they can be successfully integrated without huge write-downs.
However, there is also the possibility of big upside with this stock. Maybe we simply do not recognize how the changes to the organization will lend itself to a markedly improved bottom line. Certainly there are more eyeballs using YHOO and that could translate into enhanced revenues. And of course, Alibaba is growing by leaps and bounds and Yahoo! still owns a sizeable 16.3 percent of the retailer, worth $37.7 billion as of Friday’s close. As BABA gets bigger, the company that we just sold should benefit. Worth noting though is that probability dictates that the vast majority of IPOs are down in value one year after they start trading. However if there was ever the possibility of an exception, this company is it.
When purchased, Yahoo! was considered by many pundits to be tantamount to flushing money down the toilet. It also tried our patience at times, but fortunately it was held. This sale registers a gain of 371 percent. Yes, it did take almost six years to achieve. If this is the definition of toilet paper, then Yahoo! was a luxurious 3-ply brand with aloe vera and Vitamin E!
UPDATE April 10, 2014
TSX Partial Sale: Bellatrix Exploration (BXE)
Bellatrix’s joint venture partner Grafton today announced that it is so tickled with how its investment is coming along that it is throwing an extra $50 million into the pot on the same terms as the original agreement. How does that work again? Grafton gets 59 percent of the working interest until they get their money back, plus an 8 percent vig. After that, the take drops to 33 percent. Or, if they want, after payout they convert the whole shebang into a 17.5 percent gross royalty.
The extra capital means that wells can be drilled faster and the production growth curve gets steeper. In the greater scheme, it really doesn’t push the needle all that far, but it is another data point supporting a view that the junior has achieved critical mass and has the capability to realize its potential.
As mentioned with the recent close out of the Jean Coutu position, the discipline is to sell when the top end of the target range is reached. The exception to that is if the picture has been significantly altered. Of course, one expects a company to look a lot different between the “buy low” and “sell high” stages. In the case of Bellatrix, the assessment is that what is going on is more than a garden variety turnaround or a cyclical recovery.
The improvement in natural gas prices was anticipated, the amazing developments in fracking technology were not. Long thought to be of limited future potential, Alberta’s Deep Basin now holds tremendous promise. The bottlenecks for transporting gas will be slow to resolve, but it will eventually happen. Meanwhile, the appetite for condensate from the oil sands is voracious and will only get keener.
CEO Raymond Smith took the occasion of the JV news release to repeat his refrain that Bellatrix is sitting on an inventory of targets that will take 30 years and $10.1 billion to drill. It’s the kind of broad statement that usually can be waved aside as a prospect in only the best of all possible worlds. Though some fear the fracking revolution, it is clearly a game changer. Enterprises like Bellatrix are poised to take advantage of the transformation. This is deemed to be sufficient reason to hang on to half the position and adjust the top end of the sell target range to $13.00.
UPDATE March 10, 2014
TSX Sold: Jean Coutu Group (PJC.A)
As mentioned when the first 700 shares of this position were sold in February, the plan was to allow the remainder to run until spring, hoping for a bump over $20. However the discipline is to sell when the top end of the target range is reached, and that happened on Friday, with the stock hitting the threshold much earlier than imagined.
The relentless strength is mysterious, there has been no corporate news, and if a takeover is percolating out there, the players are keeping it very quiet. With the shares getting pricey compared to a book value of just over $4, even if a deal is struck, it’s hard to envisage a fat premium from this level. Then again, we are often left scratching our heads when we hear what some companies are willing to pay to obtain the object of their desire.
Worth noting is that insiders have also been selling according to Ink Research. Odds are that those on the inside know more than we do.
This has turned out to be a superb investment for the portfolio. The capital gain works out to 116 percent, throw in dividends and the total return swells to 132 percent. This is all the more remarkable as Jean Coutu had far fewer warts than many of the stocks that we buy and operates in a sector that is considered defensive, but of limited potential. It shows that it is not necessary to venture far out on a limb to score outsize profits.
UPDATE March 5, 2014
Nasdaq Sold: Material Sciences (MASC)
We usually don’t sell into the market when there is a takeover in progress for one of our holdings, but in this case somebody was willing to pay the same as the takeover price of $12.75 so it made sense to close out the position.
The “go-shop” provision expired without any other offers tabled, the parties have now finalized the deal details. Substantial break fees are in place to dissuade anyone from having second thoughts. The transaction will be put to a vote on March 20 and everything appears in order for it to go through smoothly.
UPDATE February 5, 2014
TSX Partial Sale: Jean Coutu Group (PJC.A)
The shares of Jean Coutu have been running very nicely the past couple of weeks, hitting a new 52-week high today. This is a little surprising as there has been no news from the company, nor a resurgence in takeover speculation. Nonetheless, the price has blown past analyst targets. Perhaps investors are shifting to a more defensive sector in a jittery market? That makes a lot of sense, as Coutu does tend to hold up well during inclement times.
The decision to sell 40 percent of the position here was something of a compromise. There is little anxiety that there might be a sudden pullback, and looking at the chart pattern, it seems like the stock wants to take a serious run at the $20 threshold. However, if one adds on the $0.50 special dividend received in December, the total of $20.28 puts it solidly into the midsection of the target range. That’s a cue to take the original capital off the table.
The other consideration is that after a euphoric 2013, the sentiment has changed markedly this year. Of course, it’s very early yet and there is lots of time to recover the lost ground, but the intensity of the mood change suggests this could be more than a blip. If this turns out to be a fully fledged correction, it will be advantageous to have extra cash ready for action.
The plan is to allow the remainder of the position to run until spring. The main positives to look forward to are a possible raise in the dividend and more consolidation in the pharmacy sector. And if it turns out that there is more to the recent surge than meets the eye, then the portfolio is still well positioned to capitalize.
UPDATE October 7, 2013
Nasdaq Sold: Yahoo! (YHOO)
Recently, there has been lots of talk among us about “dead” technology companies. Blackberry of course is foremost in the discussion. Some of us greybeards remember when IBM was on the ropes and Lou Gerstner came to the rescue. Or the “demise” of Apple before a guy named Jobs returned to the helm. Both corporations are doing alright now. Nokia was impaled, but resurrected it appears by a little company called Microsoft. And of course, the PP position in Yahoo. Talk about purchasing dead meat! Wait, not so fast, it appears the company was only a gangly, somewhat underfed teenager who is finding new legs.
And what gams to be sure. Founder Jerry Yang, much maligned for turning down the Microsoft purchase offer for the company, is looking mighty smart for making a prescient investment in China, albeit with an Arabic name like Alibaba. Let us not ignore his venture into Yahoo! Japan. These have helped turn the web portal into a juggernaut. Well maybe that is too strong a word, but man this outfit has returned to the category of potent force.
A key factor to the potential future stock price is the IPO of Alibaba, which looked like it would happen in Hong Kong but now appears to be U.S. bound. What will be the valuation? Tough to reckon but certainly a heap assuming it goes ahead. And since Yahoo still owns 24 percent of this enterprise even after selling half of its stake last year for $7.1 billion, it means that the company’s benefit could tune in at 10 figures. Alibaba is leaping in size and very profitable.
The Alibaba price will partially depend on how crazy technology goes. Right now it seems like investors are partying like it is 1998. The top songs that year were Too Close by Next (who?), The Boy is Mine by Brandy and Monica (who?) and You’re Still the One by Shania Twain. We remember her clearly, after all who can forget what is arguably Timmin’s finest export. But time does move on as evidenced that they recently shuttered her museum, opened circa 2001. Evidently, it "didn’t impress too much". The plan is to turn it into an open pit mine or something. As an aside, it was build for $10 million and sold to Goldcorp for $5 million — not a great investment on the part of Timmins.
But back to Yahoo where 48 percent of the position is being held back with the hope an Alibaba IPO will generate additional excitement and dollars. Plus, YHOO just has such cache right now. In July it reclaimed the top U.S. web traffic ranking over rival Google. Still there are many questions about the way in which the company has spent money. The Tumblr acquisition for $1.1 billion could pan out, but the skimpy $10 million in revenues means a huge increase is necessary to achieve a reasonable return on investment. And there have been a myriad of other purchases by YHOO and integrating the worker bees and technology might work in some cases, but likely not in others. That could lead to write-downs later and some could be substantial.
So it was time to take some funds off the table and we will roll the dice with the remaining position. Worth noting is that in this case nothing was sold at the Initial Sell Target. The momentum seemed so strong that it was deemed a reasonable gamble to wait. In this case it worked, but of course, that is not always the result.
UPDATE September 6, 2013
TSX Sold: Intertape Polymer Group (ITP)
Well, this one was played strictly by the book. ITP has undergone a major resurgence over the past few years to become a different company in many ways. Critical to the change is that it is now a dividend payer, and a reasonably hefty one at that, with a payout of $0.08 a quarter. The dramatic increase in the stock price has taken this former penny player to the echelon where institutions and mutual funds will find it attractive. That could boost the stock price far higher &mdash $20 and up would not be a stretch. It traded in this neighbourhood in the early 2000s and hit an all-time high of nearly $50 in 1999. Certainly at this end thought was given to holding some back, perhaps a quarter of it. Yet, at the end of the day, an ejection of the full position was taken.
When Greg Yull took over the head mantle from his father Mel, the possibility of nepotism was a concern. Well, kudos to the younger because he has done a wonderful job and he deserves our gratitude. Going forward, shareholders have reason to have confidence in the management.
One item that disturbed us a number of months ago was heavy insider selling. Greg assured us that the top brass was doing it to cover taxes. Believable indeed, but there are always alternatives, so it might also have had something to do with reducing exposure to downside risk.
This is a monster sale relative to the portfolio size, as it removes about 16 percent in one big scoop. That is a huge pile of ice cream. Hopefully that makes sense. It just seemed fun to write and this deal does give reason to celebrate.
UPDATE June 27, 2013
Nasdaq Sold: Stewart Enterprises (STEI)
We are in the midst of writing the first draft for our next quarterly. Here is what was penned about Stewart Enterprises when it was sitting at the $13.05 level: “If the price of STEI has an appreciable jump one day closer to the $13.25 takeover bid, that might present a reasonable moment to unload this position and eliminate uncertainly. Course, if we do, you’ll know.”
Now you know.
There are reasons to hold this position. The dividend will be delivered in July and it is always nice to receive. There is the possibility of a higher bid, either from Service or another entity. Our thinking is that is unlikely, but that does not mean it won’t happen. There were also obvious reasons to sell. First, there is the possibility that the deal will not happen and that would smash STEI’s stock price. We believe it will pass muster though, given that Service is experienced in this arena having done a couple of major takeovers over the past number of years. The duo becoming uno will control less than 20 percent of the funeral market in the States, an amount that seems reasonable. Quite likely there will be a divestiture of some facilities in certain markets, where the combo of the two enterprises is too powerful, but that won’t impact the deal.
If the transaction goes through at $13.25, that is less than one percent from our sale price. The closing is anticipated before the end of the year making the annualized return not much better than a GIC with considerably less of a guarantee. If it is delayed until next year, which actually is handy for tax deferral reasons, the payout will be adjusted slightly. The potential small gain from delays is not enticing enough to hold.
Stewart now enters into the category of the “Dearly Departed,” joining future mate Service that left us last year. The oldest holding in the portfolio is now Flextronics, with us since 2006. While not getting any younger, it was Benj’s pick in The Globe and Mail’s My One and Only Stock competition this year. Who knows when that one will leave us?
UPDATE June 2, 2013
NYSE Sold: Wabash National (WNC)
Since the partial sale at $10 two years ago Wabash has done okay, but not great. Quarterly results have not been consistent enough for the stock to build up steam and make a drive to the top end of the target range. The Walker acquisition created some excitement and as it nears its first year anniversary it is proving its worth, but it also created a heavy debt burden that will take years to substantially pay down.
As mentioned in our issue of last October, a final exit was contemplated for this year. It was hoped that results for the first quarter might produce a price spike, but revenues turned out to be slightly weaker than analysts were expecting. That crew had an average price target of $12.70 18 months ago. They must be getting a bit antsy.
Although there are some signs of improvement in the U.S. economy, particularly in the housing sector, overall the pattern of sluggishness has not changed. Bellwether stocks in the transport sector, such as Fedex, have been weak the past couple of months and are trailing the S&P 500 by a wide margin. This bull isn’t looking so frisky.
Historically Wabash is strongest in the April/May period of the year. With that seasonal advantage drawing to a close, it was decided to clear out this position at $10.79. It isn’t the big finish that was imagined, but the 258 percent gain over three and half years is quite satisfactory.
UPDATE February 17, 2013
Nasdaq Sold: Material Sciences Corp. (MASC)
As mentioned in the January issue, an exit from this position was being weighed as the stock price snuffled around the lower end of the target range. As we move into the second half of February and proximity to the dreaded next chapter in the U.S. fiscal cliff saga, it was decided that Friday's new 52-week high was a good opportunity to sell into strength and bank some profits from this 4-bagger.
Volume on the day was relatively high at 39,000, which still isn't much. As it turned out, it took seven separate transactions to move the 2000 shares, which is an indicator of the subdued demand for the stock. Normally when a company is on a terrific run volume multiplies, but that has not been the case here.
There is minimal analyst coverage and institutional ownership has been fairly static at about two-thirds of the outstanding float of 7.3 million shares. That float keeps slowly shrinking due to the long standing buyback program. With the stock price now above book value, continuing further purchases is imprudent.
There are no powerful reasons to expect a move up to $14, but neither are there for selling the remainder at this point. The company's management is as solid as a rock and the financial condition is the best of any in the portfolio. So without any company specific catalysts in the offing, the cue for a further sale will probably be taken from macroeconomic signals.
UPDATE January 31, 2013
NYSE Sold: Tompkins Financial (TMP)
Tompkins joined the portfolio when the company took over VIST Financial in August. VIST was added to the portfolio in January 2010, part of a move into the beleaguered U.S. financial sector. Though TMP is a wonderful company, it does not fit into the contrarian mode. The question became when to get out of this company? The Initial Sell Target was set with the aim to sell everything at the target price.
This is what we wrote in the October Contra and it still stands today. "The company appears to run a nice, tight, profitable ship. The balance sheet is a sight to behold and insiders are well vested — owning north of 13 percent — and have been recent buyers. The dividend is around 3.5 percent. It is easy to understand why non-contrarians would like to own this outfit and take home the quarterly dispersal. Quite simply, for those searching for an outfit in the financial sector, this one could easily appeal. Alas, it is doesn't fit our investing ethos, so an exit — at an appropriate price — is being sought." At this end, it has now been achieved.
Tompkins was approximately 7 percent of the portfolio. This sale decreases both the overweighting to financials and American stocks in the portfolio. It is lovely that the recent run-up in the stock market is allowing this harvest.
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