The Globe and Mail

  Forget pint-sized gains, go for the Big Boppers


Saturday, September 16, 2000

A few years ago, we were yakking with a bigwig at one of the major brokerages when he said, "I love what you do. But your target prices don’t make any sense to me."

His point, given conventional wisdom, was well-taken. Many brokerage firms and advisers recommend a stock and set the target price at 10 to 25 percent above the buy-in level. Meanwhile, in our portfolio, he was looking at purchases such as Journey’s End at $2.01, with a target of $7.25, Mitel at $1.01 with a goal of $10.375, and Grubb & Ellis at $2.55 and $14.25 respectively.

Other selections also showed immense gaps between the with the lowest percentage being 75 percent. Two disparate philosophies are at work here. The first is to grab modest gains, while the second is to go for a home run.

The rationale for taking the smaller score is more sensible since discount brokers entered the scene and full-service brokers lowered their prices. In the old days -- 10 years ago or so -- standard commissions in and out on a transaction hovered around 5 percent. A substantial gain was needed to make a profit. Today, when a buy and sell can be done for around 1 percent, even a pint-sized gain can yield a neat profit.

How do we set our sell targets? The primary method we use is looking at where the stock price has been during the previous 10 years. Generally, and this is a mite of an oversimplification, a spot is chosen near the lower range of the highs where the stock price has been for the bulk of the period. Dominating our thinking is that if a company has already indicated that it can reach a specific range consistently, it has an excellent chance of retracing its footprints.

Many battered and bruised firms that we buy are trading at virtually penny prices, often down from values that easily exceed $20. If well chosen, this bodes well for the recovery, because as the upswing ensues, momentum players enter the scene, bidding up the share price. At the $5 and $10 levels, institutions return to the fray.

One of our works in progress is Fleming Corp. (FLM--NYSE) purchased at $7.63 (US) last year with a target price of $32.75. Since our buy, the stock has doubled to around $15, but our radar gun suggests a quadruple at the end of the day is doable.

Fleming is a huge corporation, one of the United States' largest wholesale food distributors. The firm also operates about 250 stores. Prior to Wal-Mart alumni Mark Hansen taking the helm, the firm was sinking fast with falling revenue, a hefty debt load, and a barrage of lawsuits.

But underlying the bad news, major improvements were happening.

Operating costs were pruned dramatically and hundreds of employees let go. Cash saved from the dividend cut to 8 cents from 36 cents was plowed back into the company. Plus, the decrease in revenue was halted as the company was finally successful in signing up new business.

These changes indicate Fleming will soon be in the black.