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  Patience paid off with Moore

BENJ GALLANDER and BEN STADELMANN

Thursday, February 8, 2007

Almost seven years ago, the Contra Guys wrote their first column for The Globe and Mail, about printer, form and envelope manufacturer Moore Corp. The company was a prime example of a Contra stock: one that had traded for a long period over $30 and had plummeted to the $8 range, and was out of favour both because of mismanagement and the predicted onslaught of the paperless society. We had jumped in at $9.15, a brief time before the article was written.

Back in 2000, the company was trying to shake off the embarrassing shackles of the previous year's $548 million loss as it attempted a radical transformation into the "new paradigm" of the digital age. Many analysts doubted it would be successful.

What a mistake that appeared to be! The stock price stumbled to about a third of our purchase price, the nearly new management was unceremoniously discharged, and yet another potential saviour was hired. If our antennae had been sharper, they would have recognized that this was an ideal time to average down. Unfortunately, that opportunity eluded us.

Averaging down is a strategy that many professionals eschew, suggesting that it is essentially a case of throwing good money after bad. However, we think that if our conviction that the enterprise continues to be a prime turnaround candidate holds firm, then buying more at a lower price makes sense. Currently in our portfolio of 17 stocks, there are four that fit into this category: Abitibi Consolidated, Analysts International, Cygnal Technologies and Kelman Technologies. All appear to have excellent upside potential.

Assuming the helm at Moore was Robert Burton, who had an attractive pedigree as a turnaround artist. After a rough start that left many investors dubious, as is often the case when returning a beaten-down behemoth to form, he did work his magic. Eventually, Moore merged with Wallace Computer Services. Later, after Mr. Burton left with a handsome reward in his pockets, RR Donnelley stepped into the fray in a share exchange. Recently, the stock jumped to our target price of $37.44 (U.S.), and it was time for us to seal the envelope and say adieu.

Given that fewer shares were in our portfolio after the various corporate combinations, our adjusted purchase price worked out to $14.52 (Canadian), making this position good for a triple. Tack on the dividends received over the years and the return was nicer still. We're not sure how many of our Contra the Heard subscribers stayed aboard for the full ride, though: an eight-year hold strains the patience of the average investor.

In 2005 Mr. Burton pursued another outfit in the same field, Cenveo, in what was considered an unfriendly move by management. However, this ex-professional football player's bullishness eventually won the day, and he is now chairman and chief executive with a large share holding. Since his interest in the company commenced, the stock price has quadrupled. Unfortunately, this ship passed us by without a position being taken. We'll be watching for him to sell this enterprise and move onto another where, hopefully, our forces will unite once again.

The confirmation of many lessons is ingrained in the Moore holding. Cherry-picking out-of-favour enterprises can lead to grand-slam gains. Be willing to average down when the stock price does not move as hoped. Go with proven management. Enjoy the dividends that allow one to be stupid longer as the stock prices moves in every direction but up. And be willing to be patient with a purchase while not falling in love and holding forever.

For those who delight in flashing back, our second column was about the stupidity of stop-loss orders. We still think that they are foolhardy. Heck, if a stop-loss had been placed on Moore, money would have been flushed down the toilet instead of generating a lovely profit.


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