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  Of blogs and bogs

BENJ GALLANDER and BEN STADELMANN

Thursday, February 23, 2007

It's quite amazing how the English language keeps coming up with new words.

The term "blogosphere," which describes the aggregate contribution of journals and web logs on the Internet, was coined by prolific author W.T.  Quick as "a name for the intellectual cyberspace we bloggers occupy." The term has taken off impressively; a Google search now yields more than 21 million hits.

Mr. Quick made his suggestion on New Year's Day, 2002, on a highly charged political web log called The Daily Pundit, itself a play on The Daily Prophet, a fictional newspaper in the "Potterosphere."

It's perhaps fitting that the first response to Mr. Quick's proposal is also recorded for posterity.

Ron Rotherford gave a rather backhanded compliment: "Wow. Good job at creating history. You'll be able to tell your kids and their kids that you were the one who named the environment all us dorks waste our lives in. Keep up the good work."

It is easy to spend far too much time reading what other people have to say, and like the rest of the Internet, the problem is finding the worthy stuff amongst the dross. Though not regular readers, we find Larry Macdonald's blog to be a good survey of issues relating to Canadian investors, while Marc Faber reliably dishes out the antidote to the industry's positive bias with his Boom Gloom Doom commentary.

For something erudite and a bit esoteric, try , which follows one gentleman's odyssey as he tries to make sense of the competing galaxy of investing ideas on both sides of the border.

It's a safe bet that the Contra Guys won't be making an addition to the blogosphere; we don't wish to blather on a daily basis.

From blogs, let's meander to bogs — peat bogs to be precise, and business trust Sun Gro Horticulture. Sun Gro is the largest producer of peat moss in North America and the dominant provider of growing-media products to greenhouses and nurseries.

Sun Gro was part of the early wave of business trusts, and it went public at $10 a unit in March 2002. Initial distributions were set at $1.17 on an annual basis, a level which turned out to be too high, given the effects of a strong Canadian dollar, rising transportation costs and the need for capital investment to ensure sufficient peat production to meet demand.

Distributions were cut to $1.01 in June 2003, then further trimmed to 90 cents in August 2004. It was after this second reduction that one of us bought the units at $7.41 for his registered retirement savings plan. The other Contra Guy, however, has never found this investment to be attractive.

Unlike the Contra the Heard portfolio, where large capital gains are pursued, this purchase was strictly for long-term tax-sheltered income generation. The rationale for the selection was a confluence of a number of important criteria:

  • Insider buying. Since the distribution cuts, chief executive Mitch Weaver and several other directors and senior management have bought over 500,000 shares on the open market. Quite simply, it is not often to see so many insiders accrue positions, and put such substantial dollars on the line.
  • Market dominance. Sun Gro controls about 70 percent of North American peat production; that position has enabled the company to pass price increases along to customers to defray rising costs.
  • High barriers to entry. It's not easy to start a peat distribution business from scratch. Peat is a limited natural resource. It is also bulky and heavy to transport, making importation from overseas impractical.
  • Favourable trends in industry. The aging population should be good for the growth of gardening. The rise of environmentalism suggests people will spend more on landscaping, and less on stuff that ends up in landfill. Climate change may increase the need for controlled growing conditions.
  • Long reserve life. Founded in 1928, Sun Gro has sufficient peat reserves for about another 50 years of production.
  • Income, not capital. Distributions can be categorized as dividends, interest income and capital return. The last of these is an indicator of a depleting asset; shareholders being paid with their own money is not a sustainable business model. Sun Gro's distributions have no capital component.
  • The business is not without its risks. Bank debt is high, bad weather during the peat harvesting period can severely affect production, and the saga of the proposed tax changes for trusts drones on. But one Contra Guy rests content that Sun Gro will help fund pottering about the pansies in his dodder age.


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