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  64.8% return for '01 is okay by us

BENJ GALLANDER and BEN STADELMANN

Saturday, December 29, 2002

With the end of 2001 approaching, it's time to examine stocks we mentioned throughout the year. In an article about stone-cold sectors last January, we suggested Stelco Inc. (STE.A-TSE) as a buy candidate at $3.50. The company started to thaw out, hitting $5.14 in July, but then it was back to the deep-freeze, bottoming at $2.05 in late October. It has recovered nicely to $3.21 and we continue to rate this steel firm as a solid long-term prospect.

Also in January we made a rare short call, putting the cross hairs on cellphone makers Verizon Communications Inc. (VZ-NYSE) and Motorola Inc. (MOT-NYSE). Motorola did get hit hard, and we recommended covering the short in April when it was down 40 percent. As for Verizon, it has muddled along, down about 10 percent.

In the speculative category, we cited gold miner Viceroy Resource Corp. (VOY-TSE) last June when it was trading at 25 cents. The financial squeeze on the firm has worsened and the stock has dropped to the 10-cent range. As a much more stable gold play, Richmont Mines Inc. (RIC-TSE) was offered, then trading at $1.80. This corporation has proved to be resilient, and at the current price of $1.75, we continue to rate it an excellent bargain.

For those who have been following us closely this year, we talked a lot more about selling than buying; 2001 was a year to harvest gains on astute investments from previous years and hoard cash until the economy has travelled further through its recessionary path.

It has added up to a banner year, in which our portfolio generated a return of 64.8 percent. That's a satisfying performance for a year in which major indexes lost money, but it is interesting to note that it barely improves our 10-year return of 25 percent annually. That's because this year's result replaces the one for 1991, which was also a sterling success at 59.4 percent.

As for high and low points, our best move was the sale of grocer Fleming Cos. Inc. (FLM-NYSE) last spring at $31.46 (U.S.). Not only was this a wonderful 178 percent gain on its standing at the opening of 2001, but the stock has subsequently swooned, now trading at $19.11.

Bonehead plays were rare, but one that stands out was our doubling down on our position in clothier Hartmarx Corp. (HMX-NYSE) when it dipped to $1.90 last August. By an incredible stroke of luck, just two days later, The Lincoln Company LLC announced a hostile takeover of Hartmarx at a fabulous premium, offering $4.50 a share. The stock price surged to $3.90 but we were content to hold out, sensing that Hartmarx's stonewall tactics were designed to drive the price even higher.

To our horror, Hartmarx's sclerotic management had no intention of dealing with their unwelcome suitor, and Lincoln eventually gave up. Understandably, shareholders fled for the exits, and the stock now languishes at a miserable $1.61. That's a big fish that got away and we wish that we had dumped half our position while the bait was tempting.

What about 2002? The Enron-Nortel debacles will likely be repeated frequently, as this recession takes a wrecking ball to feel-good fairy tales. Even companies with great track records will find it a challenge to meet high expectations.

Recent events in Argentina point out the perils associated with an over reliance on the U.S. dollar, which is overdue for a correction. Long-term interest rates are heading back up, hinting that governments will once again turn to deficit financing. Derivatives can magnify the risk to financial institutions that miscalculate the consequences of these trends.

In our opinion, this remains a good time to have money on the sideline as markets remain high by historical standards. There are some bumps in the road ahead, but we suspect that exceptional bargains will be the result.

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