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  2010 in review: U.S. stocks

BENJ GALLANDER and BEN STADELMANN

Wednesday, January 12, 2011

Our last column was all about our Canadian results. This one focuses on our southern neighbours.

One enterprise that we first wrote about in 2009, and then in 2010, was Material Sciences. When first proffered, we described how the company had been demoted to the OTCBB as it was going through a severe rough patch. Of course, that was not unusual in those lean recessionary times.

As we stated then: "Material Sciences was purchased because, at a little over a buck a share, it was essentially trading at a level as if bankruptcy was imminent, yet the balance sheet indicated otherwise. Despite disappointing sales, the company had carefully managed cash flow and remained debt free."

When the article was written, the enterprise was trading at 95 cents, but has since had a huge run, finishing the year at $6.40. The target range of $10-$14 indicates a double or so from here. It has been restored to the Nasdaq.

Novell was at $5.80 when covered in March, just after the takeover bid from Elliott Associates at $5.75. Our bet was that Elliott, a major shareholder, was just a stalking horse and looking for another outfit to swoop in at a higher level. After a long wait, it happened in November, when Attachmate arrived with an offer at $6.10. It is not a done deal, as first Novell must sell 882 patents to CPTN Holdings, a consortium backed by Microsoft, for $450 million.

This will mean additional money in the till for the fellows at Attachmate, combined with another billion dollars or so Novell has sitting in the till. In all likelihood, the deal will close in the first quarter of 2011. Unfortunately for us, after at least one takeover of a Contra stock in every year that we have published, and five in one exciting annum, last year the streak was broken. In a portfolio that normally features from 15-25 positions, that was one probability-defying run.

Iteris was another topic of our affection in March. Trading at $1.75, we marvelled at the company's clean balance sheet, ability to make money virtually all the time, and the possibility that this company specializing in traffic management would tap into government infrastructure spending. Until now, the stock price has languished, finishing 2010 at $1.82, although the enterprise remains profitable and new contracts continue to flow.

ITI remains one of our favourites, with a real possibility of a double in store. With the balance sheet remaining squeaky clean, it appears reasonable to assume that patience will be our best ally. Insiders who own about 22 percent will be waiting alongside us. In a best-case scenario, management will have to consider invoking the shareholder-rights plan that was activated in the past year to ward off unwanted suitors.

In May, staffing services power house CDI Corporation was our subject when in the $16 range. After a brief updraft, the stock got hammered below the $11 level, but it had a jaunty run to close 2010 at $18.59. Expectations are for an ongoing upside, as the sell target is the $30-35 range. While further price appreciation is awaited, the dividend of 52 cents will help cover beverage costs.

Also in May, the possibility of a grand slam with the National Bank of Greece was teasing, albeit the real possibility existed that the complete investment could be lost. Purchased at $3.01, before being averaged down upon at $2.38, the economic problems in Greece and the EU have exacerbated the risk profile of this position, which closed at $1.68.

One of the bank's key problems is the 15 percent or so of its assets in Greek bonds. If those have to be written off or heavily discounted in a restructuring, the bank will be negatively impacted. Also, about 6 percent of the bank's loans are non-performing, an exceedingly high level. This one continues to have tremendous upside potential, although a wipeout is also plausible.

The Motorola of last August is not the same outfit as today. Then trading below the $8.00 level, it moved up in the last quarter to finish at $9.07. This organization has since undergone radical change, selling off its wireless network assets to Nokia Siemens Networks for $1.2 billion and splitting the remainder into two companies, Motorola Mobility and Motorola Solutions, with one goal being that shareholder value will be unleashed. Analysts are divided on which of the two is a better bet, but the barn contains more bulls than bears.

In September, General Electric traded around $16.50 when it became the subject of our affection. Our feeling was that the company is an excellent bellwether of the economy and that, as recovery happened, GE would prosper. It closed 2010 at $18.29.

The target price of $35.24 remains distant. If the stock does move up, in all likelihood the dividend will also increase, as it has done twice since our purchase. Of course, if there is a double dip, GE will likely take it on the chin, alongside many other corporations. However, as long as the dividend remains in effect, some return on investment will be achieved. This one remains a lovely counterbalance to some of the smaller players in the Contra portfolios.

The outcome? With only one negative return amongst the bunch and the grand slam of Material Sciences, ultimately a very solid score.


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