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Gal^Stad
Investments Inc.

spacer April 2009
Commentary

A year ago in this section, we wrote about the economic turmoil. Well, as Bachman-Turner Overdrive sang, "You ain't seen nothing yet." Was their devil woman perhaps the stock market?

At that time we stressed the importance of diversification. We concluded the commentary by writing, "there is still a bread basket of money invested in the old boring GICs and money market funds at some of the major banks. Interest rates from 3.5 to nearly 5 percent are not exciting, but more certain, and some of the funds wait to be deployed in more exciting vehicles."

Though our stocks were whacked, both inside and outside the Contra portfolio, how electrifying those stodgy income products now seem!

So once again, as is our annual dance, it's time to write about investments that one or both of us hold outside the Contra portfolio that may be of interest to readers. And yes, there remains lots of money in those boring old GICs, but here's hoping they cease to be the asset stars for much longer.

If you've been with us awhile, you know the drill: these are stocks that, for various reasons, didn't fit the Contra portfolio's needs when acquired. Which is not to say that they'll never join the CTH roster; some companies have been plucked from these ranks to join the parent club in the past. Think of 'em more as the farm system than the Island of Misfit Toys.

First, an update on the positions mentioned last year that both of us own.

Hartco Income Fund was a delight, going back almost three years. The distribution remained a stable nickel per month on purchases that were all at $3.46 or less. And then in February the trust announced that it would convert to a corporation to comply with the federally mandated tax changes that take effect in 2011, and the prospective dividend rate was unclear.

That uncertainty sliced the price and it currently is $1.56. While it wouldn't surprise us to see the dividend suspended for a period after the corporate transformation, management and employees would surely like to see it maintained, given that they own so much of the company.

Although Hartco will be operating in a declining market, this one has an excellent chance of appreciating in the longer term. Therefore, it remains an intriguing buy.

Last year we wrote, "Our experience with True Energy Trust has been less fortunate. We both bought this one too early while the price was careening downwards, and deservedly so."

So then we bought in again, and the price continued its downward trajectory. Worse, the lovely distribution is now zero. This is an ugly tale that could end in bankruptcy unless some assets can be sold. The potential upside we see persuades us to continue to hold. No more buying, though. We already have enough of this dismal position.

Macquarie Power and Infrastructure Fund was in the high $8 range one year ago. Now, down to $5.75. Fortunately, the yield is still a handsome 18.5 percent. We're holding and praying the distribution doesn't get cut.

Mitec Telecom is about half the price that it was last year, but results continue to improve. If not for the huge float, perhaps it would be worth more than 7 cents per share. This one could yet prove to be a very good investment, especially if the firm chooses to eschew the consolidation route and initiates a buyback if and when funds are available.

Besides which, Mitec has a number of irons in the fire that could prove positively toasty.

MediSolution, which we wrote was showing signs of life at 20 cents, showed a healthy enough pulse rate to entice major shareholder Brookfield Asset Management to take it private at 30 cents. We're waiting on the shareholder vote, which should pass next month, to collect our payout.

Now, a look at the equities only one of us possessed.

RioCan Real Estate Trust dropped from around $20 last year to the current $13.98. Occupancy rates remain high, at almost 97 percent, rents were boosted by 2.6 percent over the last year and distributions were increased for the 15th year in a row. REITs will not have to convert to corporations, giving them certain tax advantages over other trusts.

We have two questions: Are the likely declines in commercial real estate values and occupancy rates already reflected in the reduced trust price? And will the distribution be maintained?

CEO Edward Sonshine founded RioCan amidst the retail wreckage of the recession of the early 1990s. That experience, plus his decision to cut expansion in 2007 due to an overheated market, should help the company ride out the current contraction.

Peat moss specialist Sun Gro Horticultural was at about $5 a year ago. It currently sits at $2.26 and the distribution has gone the way of the dodo. CEO Mitchell Weaver has chosen to apply what was once distributable cash directly to debt, and the lower Canadian dollar should help. The optimist continues to hold.

Pebercan had a beautiful balance sheet, with zero debt and a P/E of less than five. The major problem outlined was political risk. Lo and behold, the chickens came home to roost as the Cuban authorities decided to prematurely terminate their production-sharing contract. That, plus the plunging price of oil, halved the stock from the $2 range of 2008.

This outfit is now winding up all commercial activities and will distribute proceeds from the $140 million lump-sum payment from the contract buyout. Though this appears to be a lot of money on paper, a lack of transparency on management's part about what shareholders can expect to receive caused this position to be dumped at $1.09.

Spar Group has been performing reasonably well, although operations in the fourth quarter dipped, something we attribute to the economy. And it remains a question whether the marketing services this enterprise offers will be designated a relative luxury against a backdrop of corporate belt-tightening. It currently checks in at 61 cents, about half where it was last year.

CEO Robert Brown was an exceedingly active buyer at this level and higher until December 1, but has been on the sidelines since then. Delisting is a risk, if the stock price doesn't climb to the buck level and the Nasdaq becomes less lenient than it has been. Should that come to pass, would it be time to take it private? One of us continues to hold.

Bioject was sitting at 40 cents a year ago and now rests at 16. The company has debt due this quarter; thus far, creditors have been very cooperative, but the slump in revenues and ongoing losses might cause them to lose patience. A recent patent approval caused the stock to spike, triggering a sale at 14.5 cents.

Typically, the stock price ultimately shrinks after a consolidation. True to form, staffing provider Teamstaff is now around $2.09, half the worth of a year ago. However, it's putting up good numbers and could shine in the future. The balance sheet remains very healthy.

NTN Buzztime came perilously close to ending up in the Chapter 11 basket. Sitting just south of 50 cents a year ago, it was buzz-cut to 9 cents before the New Year. A new, proven management team was installed, and with it\0x2026hope. The company is now at 24 cents. It could prove to be a big winner and makes for an interesting speculative play. However, one should not make a decision about this one while playing Buzztime Trivia on one of their machines at the local pub.

Andrea Electronics has been around for decades but has been struggling to survive. In the past annum, the stock has dipped to about a nickel, although it does tend to spring upwards every couple years or so. It was played previously for an excellent gain, but that doesn't mean lightning will strike twice.

The other penny plays have seen mixed results, albeit mostly to the negative.

Burntsand is reporting reasonable numbers and could have some good legs. In the commodity camp, Stornoway Diamond took a beating and the position is being held. Insiders have been buying. Goldstake Explorations is barely hanging on, but looks positively spiffy compared to Brazilian Diamonds, which is grasping for a lifeline by selling off assets.

Sold at a loss for three and a half pennies was South American Gold and Copper. Maybe they can do something now that they are producing -- maybe. However, the 600 million-plus outstanding shares will harm EPS.

Nventa Biopharmaceuticals gained a new incarnation through the takeover by Akela. But the combination didn't promise to yield an invigorating elixir, so the broker was called in the morning and the holding was exited at a soiled penny per share.

There have been a couple of noteworthy winners. Security outfit Intrusion was at 15 cents a year ago. When it reached the 40-cent neighbourhood, an attempt was made to sell the whole position, but only part of this thin trader went out the door. Hopefully, another chance to drop it at this level will present itself.

Enerflex Systems moved up smartly from the December 2007 purchase of $8.76. It was sold at $14.24 before it ran further. Since then, it has dropped to $10 and change, but neither of us is running to buy.

Where has money found a home in the past year? In all of these cases, only one of us made these investments. A whack of funds was put into new issues of five-year bank preferreds ranging from 6.2 to 6.6 percent. It would not be a surprise to see banks offer more of these.

Algonquin Power was bought at $2.06 -- the assets were attractive, the debt load judged to be manageable. It pays a fat distribution. One wishes, however, that more competent management were in place.

On the big red-flag front, Bank of Ireland was purchased at $4.66. A tax loss was taken at $2.24, but after the requisite 30 days had elapsed, it was repurchased at $1.66. This could be a ten-bagger, or go bankrupt. Or be whittled by dilution.

Another that falls into the same category is insurer and investment management firm MBIA. Bought at $4.11, this one will likely either go big or just go. It is possible that the company will get the boot from the S&P 500 index; in such a case, those interested in taking a stab might then find it at an advantageous entry point.

To help take the edge off the losses, an old winner, Brick Brewing, was reacquired. Both of us owned this one the first time around and saw it do about a quadruple between 2003 and 2005. This time, the purchase price was a quarter -- far less than the original entry point of 67 cents, but still more than the deposit on an empty.

Brick is struggling, but given the rate at which champagne is giving way to beverages sold at the "legal minimum price," this one could end up a lovely winner. Buyers must beware that the firm is financially cornered and could tipple off a cliff. In the meantime, we'll quaff their products while expanding our bottom line.

Ultimately, there are more stock opportunities out there with big possible gain written all over them than at any point in our lifetimes. And funds, as we mentioned, are standing by to be deployed. At the same time, risk is also higher, and the landscape will be littered with the corpses of bankruptcy victims. Risk-reward ratios rest firmly at the centre of the investing equation. No new paradigm there. In the meantime, the Contra portfolio has 21 positions, below our normal maximum of 25.


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