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  We're bruised but not battered

BENJ GALLANDER and BEN STADELMANN

Saturday, November 3, 2001

Prior to the tech mania, our investment letter, Contra the Heard, had among the highest five- and ten-year returns in North America versus other newsletters and mutual funds. But while many in the field piled into Internet and related plays, we merely dabbled in this sector.

Their returns skyrocketed, leaving us to suck up their dust, as our turnaround value plays ambled left and right. The investing world clanged the bell in normal fashion: people only have so much money to invest in stocks, and if they choose one sector, less remains available for other arenas. Our firms were deserted, unloved. Sticking to our guns, we scooped up additional out-of-favour positions, waiting for the pendulum to swing.

According to historical norms, it has swung. In fact, before September 11, our portfolio was up about 70 percent for 2001. Then, our results succumbed along with the market, leaving us at around 46 percent. Mighty fine, given the beating the markets have taken this year.

Huge gains have been reaped from a variety of sources. On the American side, our defensive grocery distributor and retailer Fleming Cos. Inc. surged, purchased at $7.63 (U.S.) and sold at $31.46. Occidental Petroleum Corp. came and went at $17.50 and $25.34, Utah Medical Products Inc. at $6.63 and $12.49. Kaneb Services LLC spun off its pipeline operations, and we sold it at $16.79, another fat gain over our split-adjusted $5.76 purchase price.

On the Canadian side, Spar Aerospace Ltd. was sold at $12.44 (CDN), better than triple the $4 buy-in price after returns of capital.

Some stocks that remain in the portfolio have also done exceedingly well. OfficeMax Inc. has about doubled this year from the $1.60 (U.S.) level, but remains far from our target price of $13.44.

In Canada, Clairvest Group Inc. moved from our buy price of $3.41 (CDN) to the $5 level, remaining on our Buy list with a target price of $8.70. Moore Corp. Ltd., after a long string of disappointments, has staged almost a triple this year and appears to be on a determined up-trend.

Some of the biggest gains were from takeovers. These included Luscar Coal Income Fund,the subject of a column last October, which we purchased at $1.48 and unloaded this spring at an average price of $4.09. Gulf Canada Resources Ltd., which we wrote about in March 2000, was also a sweet deal, acquired at $3.95 and sold at $12.40.

Of course, not all has been smooth sailing. Our steels have been walloped. Stelco Inc. was picked up at $5.88 in 1996 and has dissipated without paying us a sniff of a dividend. Stelco has been hammered by the malaise throughout the industry. Those who survive will eventually reap their rewards, and in all likelihood, this firm will come through.

Trading around a silly $2.20, this outfit is being shifted from our Hold list to our Buy list. Currently it is one of two steel firms in the portfolio, the other being AK Steel Holding Corp. One way for bottom feeders to potentially have a field day is to purchase a number of the low-priced steels. While a couple might submit to bankruptcy, odds are that at least one should pull a 10-bagger, offsetting the thrashing on the losers.

Our retailers have also been hit hard, with furniture outfit Bombay Company Inc. being an unmitigated disaster.

Purchased twice at an average price of $4.13 (U.S.), it trades at about $2.30. Bombay, in the portfolio since 1998, was a favourite pick in an article in spring, 2000. Even though the stock price has shriveled further, we remain confident that a major upside is in the cards.

Dylex Ltd. was another loser; our acquisition price of $1.51 (CDN) was higher than the tender value of $1.30. Given the corporation's current financial wasteland, we are content that our loss was not far greater.

With a couple of months left in the year, perhaps the Contra Guys are counting their chickens before they hatch.

However, given that over a third of our positions have been sold this year locking in profits, even a major market collapse won't allow a fox to steal all of our eggs.

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