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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
Average 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 8th with the rebalancing on June 22nd. 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 U.S. 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)

Average 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.

UPDATE June 14, 2017

President’s Portfolio

Nasdaq Sold: Bank of Commerce Holdings (BOCH)

Purchase Price $4.01
Initial Sell Target $11.50
Sale Price $11.65 (100%)
Current Price $11.65

With preparations for the next issue in high gear, Bank of Commerce Holdings popped and was sold. Worth noting is that the trading price and volumes in this bank have jumped, perhaps indicating that a suitor is acquiring shares. This sale takes about 9 percent of the portfolio off the table.

When we took a look at Bank of Commerce Holdings in October, we said that if the Federal Reserve raised rates in December, the stock could best its five-year high of $7.33. The Fed did so and the stock began a fast and furious move up in early November. That fit in with our view that if the Fed became more aggressive with rate hikes, many U.S. financials would start beating analyst estimates. That would lead to a strong rally in share prices despite some technical indicators which suggested the sector was overbought.

There are other reasons to be optimistic about small, regional banks. America’s apprentice leader has not only promised to subsidize U.S. manufacturers of red ties and gold toilets but to reduce regulation in the financial sector. The most likely actions would be reducing the number of those high-profile stress tests and lowering the level of required capital reserves. This is especially important for an institution like BOCH, which holds more capital. Such a policy would lower operating costs and free up money for lending.

In the healthy economic environment for banks, BOCH has performed admirably well. Deposits now total over $1 billion and loans are up smartly, while the negative effects of nonperforming assets are dwindling. A successful public offering of stock brought in $25.0 million to be used for general purposes. Management runs a tight ship and progressively finds ways to make the operation more efficient.

BOCH has been in the portfolio for over six years. It has appreciated significantly since the purchase at $4.01. The dividend has remained at three pennies quarterly throughout our holding. At the peak it was around $0.65 on an annual basis. Even with the share count increase, it seems like an upward adjustment in the payout is feasible.

So lots of positives. But with stock markets around record highs and financials such a huge part of the portfolio, it seemed reasonable to follow our discipline and sell near the Initial Sell Target. That still leaves three banks forming about 28 percent of the portfolio, an abundance to be sure.

UPDATE May 22, 2017

Vice-President’s Portfolio

TSX Sold: Norsat International (NII)

Purchase Price $6.20
Sale Target Range $15.00–$20.00
Average Sale Price $15.16
Shares Sold 2,150 (100%)
Current Price $15.15

The fight for Norsat has now made front-page news in none other than the good ol’ Globe & Mail. The potential sale to Hytera, a firm headquartered in Shenzhen, has come to the attention of politicians who have been pummelling the government regarding concerns of Canadian communications technology falling into the hands of the Chinese. The issue is especially sensitive as Norsat sells gear to the U.S. military as well as other NATO allies.

Investment Canada did a security review for potential threats and cleared the transaction. Our military experience is limited to late-night board games, so we wouldn’t second-guess these folks, but no doubt, the optics aren’t great.

While all this blew up, Privet unveiled a new bid of $11.50 USD, trumping the Hytera offer that was about to be voted on by Norsat’s shareholders. Norsat’s board has just issued a press release that Privet’s bid has been determined to be a superior proposal. Hytera now has five days to counter.

Normally we’d be having a ball watching this bidding war unfold, but this entire affair is becoming chaotic and unpredictable. As lovely as it is to see the stock price go up, there is a sense that this is an accident waiting to happen. If a deal fails to transpire, or there is a lengthy delay for an exhaustive security analysis, the downside risk is palpable. Given all this and the fact that the stock price is in the sell target range, Ben decided to step aside and cash out his position.

Of course, the counter argument is that the bidding war could continue and that would mean leaving significant money on the table. But, this back and forth will end at some point, and given that the first bid was $8.00 USD, the dry powder may be starting to run low. We’ll leave this one to the arbitrageurs to figure out. At our end, we are happy to bid farewell to one of Contra’s oldest holdings, and congratulate Norsat’s CEO Amiee Chan on a job well done.

UPDATE May 22, 2017

Vice-President’s Portfolio

Nasdaq CM Sold: Iteris (ITI)

Purchase Price $1.44
Sale Target Range $3.25–$4.00
First Sale $3.84 (5,000 shares)
This Sale $6.09 (2,000 shares)

Ben joined Benj by exiting his position in Iteris. The company’s tenure in Contra’s portfolios illustrates many aspects of our strategy and has given us more than we could have asked for. After oscillating just above the purchase price for years, the shares took off shooting past the sell target and demonstrating that stocks rarely rise in a linear fashion. Like many holdings however, it also had issues during our ownership. Accounting problems surfaced around revenue recognition a few years ago, which hammered the shares and delayed earnings. This resulted in a revolving door at the CFO suite and the bumpy departure of their former CEO. But the balance sheet was good from day one — as it is today — and the growth potential within its niche markets was fantastic.

One could argue the top-line growth last year and the hum of news items on their website means it might be worth holding. However, in our estimation the valuations are pricing in a lot of optimism. It is looking fully valued by many metrics and the company is still struggling to produce a net profit and has been without one since early 2014. Market participants often reward tech companies for their top line numbers during bull markets but punish them for minimal earnings or net losses during down markets. Therefore, their regular net losses represent a clear danger. Insiders have also been net sellers over the last year with large blocks trading when the shares are over $5.00.

For those who decide to hold, management will be presenting at the 18th Annual B. Riley & Co. Institutional Investor Conference May 24th. A webcast link is available on Iteris’s website.

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