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  2007 in Review: The U.S. Stocks

BENJ GALLANDER and BEN STADELMANN

Friday, January 11, 2008

In our last article, we reflected on hits and misses on the Canadian stocks mentioned in this column over the past year or so. Now let's take a gander at the U.S. side.

In October we suggested that high-flying auto parts supplier Autozone, whose resiliency in an economic slowdown was questionable, would make a good short candidate. At that point the popular stock was cruising at $123, but its subsequent volatility was a good lesson in why it is important to maintain a good cushion of margin when shorting stocks.

The shares hit a low of $103.40 on anticipation that new competition from Walmart and Costco would weaken earnings to be announced on December 4. Instead, estimates were trumped soundly. Headlines like "Burning Rubber" and "Awesome Earnings" send a chill down your spine when you've put down a bet on the "no pass" line. The stock rocketed to $128.80 that day, and in a flash a position that was nicely ahead sank well under water. But Autozone is an acknowledged expert at the game of beating Wall Street's expectations.

Since then, worsening credit metrics prompted Standard & Poors' downgrade of Autozone's debt from stable to negative; that has taken the wind out of the sails of boosters. So, too, is a deepening sense of gloom amongst U.S. retailers. With the stock back down to $109.70, shorts can breathe easier again.

We're usually fairly happy-go-lucky fellows, but we couldn't help but pour scorn on Blackstone Group's IPO last June. Everything from the exquisite timing of the deal to the outlandish bonuses paid out to top executives screamed that it was an exercise in exploiting the public's fascination with glamorous hedge funds. We reckoned that the only winners, besides insiders, would be short-term traders who sold on a pop after the IPO was completed.

That guess turned out to be right on the mark. After climbing from the IPO price of $31 to $38, the stock has been in a steady tailspin, currently down to $19.84. To cap it off, the company has recently announced that it wants to buy back $500 million of its crisp, new shares. Do these guys know how to sell high and buy low, or what?

While we were able to detect such a stinker, we had more difficulty finding winners. Last May we described our dogged support for Analysts International, the lacklustre computer consulting firm that hasn't done us any favours despite our buying it twice for the Contra portfolio. The well we looked out of last May at $1.85 has gotten deeper, with the stock now trading at $1.33.

Operations don't look worse, but they haven't got better either. Revenues are stable, but efforts to boost margins have so far been ineffectual. We're pinning our hopes on the new CEO, Elmer Baldwin, who is a proven turnaround man and has a record of fixing up companies to put them on the sales block. Analysts sure needs the help. It is one of only five American stocks on our current "Buy" list.

Another loser was Spar Group. Trading at around a buck, it was recognized that this struggling merchandiser's Nasdaq listing could be in jeopardy. This has indeed been the case, as the company received the dreaded non-compliance letter from the exchange in November.

Spar now has until May to boost its stock price from the current 74 cents to the $1 mark, or it could be relegated to the frozen steppes of the over-the-counter market. Often though, if a company chooses to appeal, it is given a second chance lasting another six months.

On a happier note, our selection of electronics manufacturer Solectron is off to a promising start. In June our pick received a takeover offer from rival Flextronics at a nice premium, and the deal went through in October. That makes 15 years in a row that at least one member of the Contra portfolio has been bought out.

It was a cash/share swap deal and we elected to take the shares in Flextronics, which currently trade at $11.00. We really like this combo and feel it has the potential to be a leading player in the industry. Our Initial Sell Target is $28.24.

While we didn't have any major blowouts with our American picks, neither did we have any major successes. Add a depreciated currency to a loss on the Canadian side and the results for 2007 were very disappointing. Our portfolio dropped 15.5 percent, over half of that due to the drop in the U.S. dollar. This was our first loss since 2000, previous to that was 1990.

This dismal year also took a bite out of our long-term performance. The 10-year annualized return now stands at 16.2 percent and the 15-year figure is 21.8 percent.


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