We stand by Cygnal
BENJ GALLANDER and BEN STADELMANN
Last year in The Globe and Mail's My One and Only Stock-Picking Contest, our selection was Cygnal Technologies. Our pick quickly moved towards the bottom of the pack, where it stayed, registering a loss of 26 percent.
That put us in the eighth position out of nine participants. The winner was six-year-old Emilia Loewen. We have offered her a job once she reaches the age when child-labour-law restrictions are not an issue.
The competition has been operating since 1997, and the picker with the "mostest" has to be York University associate professor Moshe Milevsky, who retired after a string of three championships. Our kudos go out to him.
Mr. Milevsky has studied how to win these events and has concluded, "Oddly enough, the way to win such a contest is by doing the exact opposite of what one should do with their own personal portfolio."
Coming up with an entry is indeed challenging. One overriding question is, do you play to win the whole enchilada with a grand slam, or stroke for a line drive that offers a better chance of a top-four finish and the opportunity to play another year?
Tough call, but we generally decide to swing for the fences, albeit with a Contra portfolio pick. While we simultaneously taper the risk quotient, the fact is that "slugging percentage" is a salient element in our methodology.
Why did our network-communication-solutions provider do so poorly? Well, like virtually every Contra selection, Cygnal is in the midst of a turnaround, and this one is taking longer than expected.
Reports suggested that the enterprise would turn a profit towards the end of 2005, and when a company moves from red ink to black, the stock price often jumps.
Unfortunately, a positive bottom line did not appear. Instead, during the last quarter of the year, revenues were down from the prior year, while selling, general and administrative expenses were up.
And though the loss was reduced from 7 cents to 4 cents a share, this relative improvement was insufficient to warm the cockles of investors' hearts, causing the stock price to flinch to a historical bottom of 81 cents — far below our initial purchase price in December 2003 of $1.51.
However, all was not negative. Amidst the dismal results was the news that a new chief executive, Jos Wintermans, was appointed. We knew Jos from his previous stint at hardware outfit Sodisco Howden, which we acquired at $1.19 in 2000. It was taken over by Canwel Building Materials three years later at $3.25. That pleased us. With the new boss signed, we more than doubled our position in Cygnal, lowering our average purchase price to $1.13.
More good news was soon on the horizon as Mr. Wintermans appointed his former right-hand man, James Shannon, as vice president finance and chief financial officer. It is always nice to be able to choose who one works with, and it is fortunate for investors that the old team has been reassembled.
The positives do not finish there. Last year, the company was bedevilled by the need to do a debt refinancing. That is now over with. The terms of this contract mean that not quite two million warrants will come into play at around $1.50. That means that it is quite likely that, before the stock has a hope in heck of reaching our target price of $4.54, people cashing in will trip it up.
Tough slogging remains. Odds are that results for the next quarter or two will be nothing to write home about. Operations still have to be streamlined and rationalization costs will occur as employees are let go, and perhaps there is a writedown or two hiding in the woodwork.
While we make our share of mistakes when buying stocks, our second purchases far more often than not work out well. Hopefully, that pattern will continue. And we'll be watching this one closely to see how it would fare against this year's crop of choices in the Globe and Mail competition. Because if we had not already been eliminated from contention, Cygnal would be our overwhelming choice for 2006.