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  2008 in Review: Canadian stocks

BENJ GALLANDER and BEN STADELMANN

Monday, January 5, 2009

We don't need to tell you what an ugly investment year 2008 was for almost everyone. For us it was no exception. Our saving grace was that we listened to ourselves. Back in July 2005, we wrote in our investment letter about the "upcoming darkness." That led us to stash lots of cash from realized gains on the sidelines, and we accepted the "boring" returns of guaranteed investment certificates. Funny how those GICs proved to be so exciting.

However, the stocks that were still in the Contra portfolio got hammered. Some were Canadian ones we've written about over the past year. We'll cover the American companies in our next column.

In February, Intertape Polymer, then sitting at $2.66, was the topic. Our belief was that its turnaround was progressing. Alas, recent good financial results that helped hold the stock price steady have now been overshadowed by the news last month that the company is releasing about 7 percent of its work force, extending the holiday closings on all facilities by a week and bringing many services in house.

Despite the difficulties, executive director Mel Yull stated, "Nonetheless, we are encouraged with the prospects for 2009." Mr. Yull's plan was to turn the company around and then see if a purchaser might bite. However, given current conditions, that possibility is not on the near-term horizon. Currently trading at $1.20, the stock remains on our Buy list.

In March, we commented on Norsat International, another outfit that was tooling along handily in turnaround mode until the economic havoc hit. Purchased for our portfolio at 65 cents, it moved up smartly, touching $1.60. Sadly, it has plummeted to 52 cents.

This satellite communication manufacturer seems to be very smartly managed by CEO/president Dr. Amiee Chan. The firm was has been capturing lots of profitable, smaller deals while expanding its product line. In the most recent quarter, revenues were up by about 30 percent year over year. While the net number is not staggering, earnings jumped to $700,000 from $200,000.

Dr. Chan, while noting the economic headwinds, opined, "We expect Q4 to be our strongest quarter of the year from both a revenue and profitability standpoint." Time will tell.

Naturally, we shareholders would love to see it happen. Plus, it would be nice if there was more cash on a balance sheet that is lovely, yet cash poor. In the meantime, our target selling price remains $1.84 and we'll rest patient with this one.

Gold was the subject of another March article. We delved into the two different methods each of us is using to play in this sector outside of the Contra portfolio.

One of us loaded up on units in Central Fund of Canada. This entity holds gold and silver bullion in a roughly 50-50 split. At the time of the column, the units were trading at $12.51, about even with the current price of $12.55. What many people do not realize, and is rarely mentioned in the Canadian media, is that gold bullion has been an excellent hedge to the precipitous drop in our loonie.

The other contrarian was sitting on a bunch of penny plays, confident that at least one would double in the next year. Patricia Mining was just consumed, albeit it for a loss, by a recent Contra repurchase, Richmont Mines. Hope now rests with RIC, which we both feel can triple from the current $2.15 level.

The other companies, Goldstake Explorations, Opawica Resources and South American Gold, with the appropriate symbol of SAG, have all done just that. With only a few months left for the double to occur, the likelihood is negligible.

On May 1, International Workers Day, the topic was Pebercan, a Canadian company with operations in Cuba. The outfit sported some fancy numbers with price/earnings of 4.5, debt/equity of 0.09, a price/book of 0.79 and a one-year return on equity of 21.2 percent. The stock traded around $2.

Not anymore. After touching a low of $1.13, the price has rebounded to $1.40. Given the current oil price and the fact that payments from the Cuban government are normally late, investors have reason to be pessimistic.

On the plus side, odds are the government will pay eventually and oil will rebound. It remains an interesting buy possibility, although the low trading volume makes it a tough catch.

After May 1, not one Canadian company was mentioned by us as an enterprise worth adding to a portfolio. Little excited us. And while there are plenty of possible bargains, the shoes still to fall and the prospective length of this economic downturn make choosing the winners of the next few years a very tricky process. The "Buyers Beware" sign is very prominent right now, even for contrarians. However, the point will likely be reached where we will be far more optimistic than the norm while general pessimism still abounds.


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