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Gal^Stad
Investments Inc.

spacer April 2006
Commentary

Spring has sprung, and that means it's time for our annual round-up of investments outside of the Contra portfolio that one or both of us likes. As usual, we'll also steal a glance at how those from last year have played out.

While the income-trust sector is one that we remain wary of -- as evidenced by our January commentary -- those payouts continue to tempt us. One trust with a yield in the seemingly too-good-to-be-true zone is Clean Power Income Fund.

Despite losing $3.4 million last year, the company has resolutely maintained a monthly distribution of 5.8 cents. Well, that's after cutting it back last year, which caused the share price to crater.

Clean Power's current payout ratio may seem as hyperbolic as athletes who insist they "give 110 percent," but there is light at the end of the tunnel. For starters, the corporation still has $8.8 million in a reserve account to cover shortfalls; $1.4 million was used last year.

The troublesome GRS division that derives power from landfill is up for sale, while wind and water operations perform steadily. Construction on the Erie Shores wind project is well advanced, with 55 of 65 turbines up and ready to spin.

With a little luck, distributions should be fully covered in a year or two, putting this alternative-energy provider on a firmer footing.

While both have us have had stakes in this trust for a while with the initial position acquired at $9.05, one of us backed up the truck and really loaded up when units drooped below $5 last October. One of us currently rates it as a Buy, the other as a Hold.

One of us recently added another bona fide contrarian name to his trust holdings: Atlas Cold Storage. Atlas's well-publicized implosion in 2003 was a wake-up call to the dangers in the sector, and foreshadowed a growing list of similar disasters. After an accounting scandal (the bottom line was not as rosy as it seemed), Atlas eliminated distributions for three years.

Operations improved and distributions were resumed at an annual rate of 33 cents. Surprisingly, the stock wilted, as Mr. Market was apparently anticipating a higher yield and was disappointed. The counterargument is that the company is clearly chastened by its checkered past and is now taking a conservative tack.

Anyway, that was the thinking when a position was opened at $6.16 by one of us. The other doesn't question this move, but was hoping for a cheaper price.

The year 2005 was a mediocre one for Sun Gro Horticulture. The peat moss king's expansion into eastern Canada helped increase annual revenues to the $200 million mark, a gain of six percent over the prior year. As much of Sun Gro's peat moss is sold in the United States, the strong Canadian dollar continued to be a headwind for the company.

High transportation costs and debt have been the other bugaboos hindering profitability.

As anticipated, the company had a high payout ratio, generating $20.1 million in distributable cash, while passing on $19.8 million to unit holders. The lack of contingency for a rainy day, plus a large write-down of goodwill has kept investors wary, with the units slumping to the $6.30 level.

That puts yield at a lofty 14 percent, a level that CEO Mitch Weaver reckons is sustainable. One of us concurs and still considers the firm a Buy, while the other still wouldn't go near this outfit, preferring businesses built on higher-quality terra firma.

In 2005, real estate was mentioned via two companies. RioCan is still being held by one of us, and he continues to waver on the sell/hold plane while collecting stellar distributions. Prime Group Realty was taken out in a takeover and is now history as far as the stock exchanges are concerned.

One that straddles the dual territories of commodities and trusts is Central Gold, which was also mentioned last year. This one mitigates the risks associated with mining for gold. One of us continues to hold it as a pure play on bullion, but he would not purchase more today. The other prefers the leverage of junior gold companies to pursue a bang on the precious metal.

A firm that disappointed in the commodity field was South American Gold. This company struggles along, moving "steadfastly" from one setback to another. The primary problem over the past year was an avalanche, which shut down operations; this is now being compounded as it is unclear whether insurance will pay out. The company was also late filing its financial statements.

The fact that Rio Tinto is working with SAG inspires confidence, and one of us remains content to hold his position, purchased at 9 cents. However, for those who are willing to speculate in outfits that, fully diluted, will have a float of more than 500 million, this one is of interest. One of us would steer clear -- he smells a stock consolidation. The company insists that will not happen. They believe a partner will be found soon to purchase 20-25 percent of the business and fund further mining.

The other two plays in this arena have done better. We both sold our Tiomin Resources when it had a brief pop. And Atna Resources quadrupled before falling back, while our gain was only better than a double -- but it was quick.

In the sorrow-drowning-elixir department, the second of us exited Brick Brewing at $2.34 last May after better than a triple in a year and a bit. Since then the stock has done lots of nothing; competition in this field making the chugging difficult.

Verso Technologies underwent one of those consolidations we hate, and it knocked the stuffing out of the stock, which did manage a recovery before drooping again. However, while one of us is content to hold, neither of us would buy it now.

One huge winner for us has been Stratex Networks, which we described last year as a "high-risk/high-reward proposition." It has indeed been high on the reward side, having quadrupled. Both of us sold some below $5.00, but we are holding some in anticipation of further good fortune.

Another big winner from the tech train wreck was Eloyalty. When the maker of contact-management software was purchased at $4.21, it was losing money and trading at around cash value. Improvement was slow and haphazard for a long time, but in the past dozen months the company has finally got the revenues moving in the right direction with some new products.

Though profits remain elusive, the stock hit the initial sell target of $9.70, where half was sold. The remainder was kicked out at $12.15. The stock continues to levitate, currently at $15.00.

The biotech field continues to hound one of us. None of the little three -- Biomira, Stressgen or Micrologix -- has performed well. The first was recently sold for about a 40 percent loss, after the CEO left and talked about how the company would have to search for a new direction. The second is undergoing a corporate reorganization that will give it a dual role in biotech and as GVIC Publications.

That should give the enterprise somewhere to report the ongoing dismal results. Micrologix is also searching for the golden cure via a new name, Migenix. Unfortunately, the new mantle is offering the same desultory results.

The uncertainty surrounding Biomira and Stressgen makes them unattractive in both of our minds. But the biotech freak among us still likes Micrologix as a longshot spec. And in what some might see as sheer folly, last fall he added still another biotech to his stable: Inflazyme Pharmaceuticals, at 12.5 cents.

One day, perhaps, one of these might work out. Of course, sly hands would immediately implement a short when this Contra Guy goes long on biotech.

A few others that weren't in the commentary last year but are regularly asked about include Twin Mining, Kinross Gold and Norsat.

Only one of us holds these three, and he was recently at the TWG AGM, looking after his purchases at 33.5 cents and more recently at 11.5 cents. To hear the "corp-talk," there is lots of potential, and the corporation might split into two -- thereby unleashing the value of both the gold and diamond plays.

Recently, Jipangu invested more than $4 million but then declined a second $8 million placement. Things always go awry for this firm, which is seeking to raise megabucks to become a producer. Still, the Contra owner is willing to hold at this point.

Kinross has finally gotten the accounting problems out of the way and there is mucho speculation that it is a takeover candidate. A poison pill was recently implemented. Having bought at about one-third of the current value, a hold is deemed to be in order.

Meanwhile, satellite maker Norsat seems to be working through management and product changes to gain a firmer footing. Purchased at 57 cents, over half the position was sold 16 months later at $1.24. After jumping further, the price has receded to the 90-cent range, largely because sales remain flat and net income is negative. At this level, it is also rated a hold.

Unfortunately, there are no other Buys for us to write about here. A desert-like aridity impacts our personal portfolios in the same way it affects Contra. In our view, it's just another cycle.


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