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  We've taken profits in a selling bonanza

BENJ GALLANDER and BEN STADELMANN

Saturday, June 16, 2001

An impressive stock market rally off of April lows has the pundits divided. Is the comeback for real, or is it merely a temporary respite from a bear market? Those who prefer action over words might be interested to note that the Contra Guys are on our biggest selling binge ever.

So far, seven of the 29 positions that comprised the portfolio at the start of the year have been sold. Proceeds of these sales are equivalent to 50 percent of the portfolio's value on January 1. Gulf Canada Resources Ltd., the target of a takeover bid by Conoco Inc., will almost certainly go at a far cry from our purchase price of $3.95, and a couple of others will probably be sold as well. In the meantime, we haven't laid out a penny.

Is the sky falling? We'll get to that, but the main impetus for these sales were the corporations' fundamentals. Our most recent sale, Fleming Cos. Inc. (FLM-NYSE), is a firm that we wrote about last September in our "Go for the big-bopper" article. At that time, it had completed its first lap, reaching the $15 (U.S.) mark compared with our buy price of $7.63. We sold it at $31.46, a tad shy of our target of $32.75.

Revenues are growing rapidly at the wholesale grocer, most notably with a $4.5 billion deal to supply Kmart Corp. The fact that Yucaipa Cos. has grabbed a chunk of the company suggests that a takeover may be in the works, but with so much optimism already priced into the stock, we decided not to hang around. Since then, it has floated to but we doubt that arch-rival Supervalu is about to roll over and play dead.

In addition to closing out positions with handsome profits in Spar Aerospace Ltd., Luscar Coal Income Fund,and Occidental Petroleum Corp., which we mentioned in a previous article, we've had three other sales that were less successful. We took a small loss with Dylex Ltd. when the buyout by Hardof Wolf Group Inc. at $1.30 a share failed to recoup our purchase price of $1.51. It's unusual for the pickings from a takeover to be so lean, but management miscues and the struggles of the Bi-Way chain diverted this one into the weeds.

Another takeover that went awry was Dynex Capital Inc. (DX-NYSE). The anticipated purchase by California Investment Fund fell apart, and it looked like the financial services company might go belly up. But lower interest rates granted the firm a reprieve. We bought the stock a couple of times, sold some for a loss, the remainder for a gain, and broke about even.

Finally, we dumped troubled silver miner Hecla Mining Co. (HL-NYSE) when it ran into trouble trying to pay off debt by selling a profitable division. It was a tough decision to let it go at a miserable 87.5 cents (U.S.), as the company remains one of the world's largest producers. Hecla later managed to sell the division to another company and the stock has since moved up to the $1.25 level on the precious metals rally.

As for buying, we're in no hurry. "Cash" may be an ugly four-letter word in some financial circles, but sometimes it makes a lot of sense to keep some around. The problem is that the energetic rally we have enjoyed since the lows of early April has been fuelled by declining interest rates, not corporate profits.

That means that price/earnings ratios are again uncomfortably stretched. Earnings will probably pick up early next year, but this resurgence is likely to be muted because, after the enormous surge in profitability over the past several years, companies are at a much higher elevation. So, we reckon that the downside exceeds the upside.


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