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  The year that was, south of the border

BENJ GALLANDER and BEN STADELMANN

Monday, January 10, 2005

Last time out, we reviewed Canadian stocks featured in this column over the past year. This week, it's a checkup on American stocks we covered.

In March we wrote about our purchase of Penn Treaty American, a risky bet on a disability and long-term-care insurer flirting with Chapter 11. The company is far from being out of the woods, but it does appear to be on the mend.

Premium revenues are up, the company reported net income of $6.6 million in the third quarter, a huge improvement from the $2.6 million loss a year ago. Insiders have been nibbling at the stock, with a dozen purchases over the past year. Trading at $1.70 when our article appeared, the stock has moved up nicely to $2.17.

Also in March, our favourite airline, the Dutch carrier KLM, was in the spotlight. At the time, negotiations for a merger with Air France were afoot. After a bit of turbulence, that merger did proceed and we now hold American Depositary Receipts and warrants in the new French company Air France-KLM.

While all airlines have been plagued by high jet-fuel prices, Air France has been sporting decent numbers. The position also gives us back-door exposure to the euro, which has been on a tear. The investment appreciated 27 percent in 2004.

In May, Novell was examined at around $9 — and on its way down after cresting at $14.24 last January. From today's viewpoint, the decision to reset our target higher and hang onto all of our shares is looking like our bonehead move of the year.

The street has given the company the cold shoulder, and not even a windfall $536 million antitrust settlement from Microsoft has alleviated that. Oh, well. Despite feeling a bit sheepish, we remain confident that future prospects are bright. So, apparently, are some insiders, who were piling on shares like urchins at a banquet toward the end of the year.

In June, we showed off one of our laggards. Theragenics, a maker of radioactive isotopes used to treat prostrate cancer, was at $4.55, and unfortunately that pooch still refuses to hunt — the stock currently sits at around four bucks. Though our timing appears to have been a bit off on this one, it remains one of our faves.

A speculative real estate play, Grubb & Ellis, was the topic in July when it was trading at $3. This one didn't qualify for the Contra portfolio, but we were both willing to hold this stock in our personal portfolios. Playing the over-the-counter market sometimes feels like an exercise in blind man's buff, but we made good money on this flyer; we both sold out our positions at around $4 a share, about where it trades now.

Finally, in September we wrote about an experiment in our quest to learn more about shorting stocks. Our candidate was Krispy Kreme. At that point the wheels were falling off the success story and the stock price had fallen to $13, but we were skeptical of the company's assertions that the Atkins diet craze was to blame. We fingered rising debt levels, poor management and a broken business model as the real culprits.

Since then, low-carb products are in the discount bin as the Atkins bandwagon is already going the way of every other get-slim-fast fad that has come before it. But has this helped Krispy Kreme? On the contrary, the company's problems are compounding by the day, with an SEC inquiry, restated financial results, a possible default on its credit facility and a blizzard of shareholder lawsuits. Nothing sweet about this dessert.

In 2005, we'll keep searching for the diamonds in the rough, but we'll also stay on the lookout for cankered hags wearing too much makeup. There's more than one way to make money in the stock market.

We would like to thank all of our readers for their kind comments and interest in what we do. All the best for 2005.


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