www.globeandmail.com

The Globe and Mail
leaftheglobeandmail

  Insights and hindsights from lunchtimes past

BENJ GALLANDER and BEN STADELMANN

Friday, January 25, 2008

With all the turbulence in the markets lately, some on Bay Street might consider emulating the daily ritual of a contrarian worker. During lunch, he would venture west of the concrete jungle and seek out the greener and quieter residential streets. On occasion, he would see a box on a lawn with the word "Free" scribbled on the front, which on occasion proved to be a good source of reading material.

Recently, the partially unread stash was unearthed, revealing two books and a magazine issue worthy of mention. Merchants of Grain was first published in 1979, yet it remains an excellent account of the international grain trade for those who wish to invest in this sector.

We did with the Saskatchewan Wheat Pool, and it has twice proven to be a great holding for us. First it was purchased in December 2004 and sold about two months later for a 60 percent gain. Repurchased again at $5.67 in 2005, it has doubled, along the way acquiring a new moniker, Viterra. More upside is expected.

The Seven Sisters, published in 1975, tells the story of the oil industry and its cartelization. The oil bugs of 2008 might appreciate this still-relevant book.

The May 1999 issue of Business Week. contained an article about small caps entitled "Hot Growth Companies." While the article would not have been of much interest to contrarians before the millennium, it is amazing how many of yesterday's growth companies eventually become turnaround and value plays.

The leader of the parade was Friede Goldman International, a builder and repairer of offshore oil rigs. After a merger with Halter Marine it went bankrupt and is now a denizen of the pink sheets, aspiring to trade for a penny. Interestingly, over half of the 100 firms named subsequently lost their exchange listings.

Nonetheless, many of these stories had happy endings for their owners, proving to be appetizing merger-and-acquisition targets. Among the top 20, nine were bought out and two merged. Of the 48 still trading under their original ticker symbols, a few have doubled or tripled, while others are trading lower than their 1999 price or at penny-stock status.

The two biggest winners on the list held positions 38 and 77 respectively. Strayer Education could then be bought for $35 a share and is now close to $165. It is headed by Robert Silberman, named by Morningstar as its CEO of the Year for 2007. The company operates 51 campuses that offer classes catering to working adults.

Hansen Natural has nothing to do with the brothers in the hockey movie Slap Shot and everything to do with trendy energy drinks, including the popular Monster Energy. Those who bought the stock at $5 in 1999 had to chill out until lift-off began in 2004. This past October it hit an all-time high of $68.40, but has fizzed by about a third since the market turned ugly.

Three stocks on the list brought smiles of recognition to our faces. Meade, which ranked high on the list at 13, is a stock owned by one of us outside the Contra portfolio, purchased in October last year at $1.56. It was once considered the world's leading manufacturer of telescopes for amateur stargazers.

But competition from Asia and steeply declining revenues have hit hard. Unless Carl Sagan can be resurrected to inspire astronomical interest among the masses, perhaps the best scenario for this outfit is a takeover bid. Currently the company is being restructured, while strategic options are being reviewed. The latter is the primary reason that it was acquired, because if a deal goes through, normally it is at a premium.

However, that is not always the case. Salton, at number three, famous for the George Foreman Grill, was played by one of us early last year when it was part of a merger deal with Applica. Fortunately, he exited the position quickly for a fast 20 percent gain because the stock now trades in the quarter range, less than a tenth of what he paid.

Theragenics placed 43rd and was actually a holding in the Contra the Heard portfolio for two and a half years before being sold at a loss. A firm that specializes in prostate cancer treatment, the stock had a short-lived recovery in early 2007. Since then the stock price has returned to the doldrums, but the company is consistently making money now, something it was unable to do for many years, so it remains of interest.

As for that wandering contrarian, a few years back he picked up his things, went for his lunchtime walk and kept going — all the way home. He has not been back to Bay Street since.


back