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  2011 in Review

BENJ GALLANDER and BEN STADELMANN

Thursday, December 29, 2011

Theragenics was in the spotlight 12 months ago, the Atlanta-based medical device manufacturer was then trading at a bargain price of $1.43. Revenue for their prostate cancer division was stabilizing after years of steady decline, while the surgical products side of the business looked robust.

The potential of this deep value play was recognized a few months later by German firm Eckert & Ziegler AG, when it made a cash bid of $2.20 a share. Rather than seeing it as an opening offer, Theragenics CEO Christine Jacobs instead treated it as a grave insult and refused to negotiate.

A better strategy would have been to sell the brachytherapy business, as the treatment has fallen out of favour in the U.S. while it remains accepted in Europe, and concentrate on surgical products. The stock now trades at $1.68, well below the rejected offer. Though Theragenics still holds considerable promise, it will be very difficult for it to be realized under its mercurial CEO.

Last February, Norsat's purchase of Sinclair Technologies was examined. With the stock trading at 70 cents, the risks associated with such a large takeover were acknowledged, but the terms of the deal looked reasonable and Sinclair's antenna and radio frequency conditioning products a good fit.

Third-quarter results released last month showed revenue up an impressive 153 percent, with net earnings of $1.1 million, an 81 percent jump. The market has been singularly unimpressed, with the stock now trading at a moribund 48 cents. There is little appetite for risky small caps at the moment, particularly those that count European defence departments as key customers. The view here is that these fears are overstated, though Norsat's 2012 quarterly numbers are bound to be lumpy.

In April, Deswell Industries was the topic. We bought into this Chinese manufacturer of injection-moulded plastic parts and electronics because it exhibited many classic contrarian value traits. The company remains beset by intense competitive pressure, with lower revenues while operating close to break even. The balance sheet looks great, with book value about triple the current price of $2.06, which is well off the $3.18 when featured. The first-quarter dividend is three cents a share.

In our view, Deswell is conservatively and prudently managed; however, that doesn't synch with current concerns regarding the accounting at Chinese corporations. For many years most Chinese firms traded at a hefty premium due to the Asian economic miracle, it's amazing to see how that has been quickly replaced with the "Sino-Forest" discount.

Last May, another foray into the beleaguered U.S. financial sector was made with Bank of Commerce Holdings. This small Californian bank was then trading at $4.26, and garnered our attention due to its ability to turn a profit throughout the financial crisis as well as its tidy dividend.

At the current price of $3.17 the bank has a trailing P/E of under 10, a forward P/E under 8, a yield of 3.7 percent and a payout ratio of 36 percent. Unfortunately, the only people who seem to have noticed these sparkling value metrics are insiders, who continue to accumulate shares.

That seems nutty, but we are talking about a bankrupt state whose idea of new leadership to replace Ah-nold was to pry Jerry Brown out of his cryogenic chamber.

We had a couple of takeovers this year, with Novell and Zarlink. Another enterprise that we hoped might be swallowed in an industry consolidation was Magnetek. When written about last August, this ailing manufacturer of control systems was selling for $1.50 and was finding recovery from the recession elusive. It's now at $8.36, but not because a passel of suitors came calling.

Instead, it is the result of a reverse stock split that occurred on December 5, and its listing moved from the NYSE to Nasdaq. When the consolidation was announced, Benj's position was sold at $1.02, equivalent to $10.20 today. The most recent quarter was the most profitable in a while, but at this point we would not touch it, as the vast majority of stock consolidations result in a weak stock price for at least a year.

Also in August, another sleepy value stock, Akita Drilling was covered. At $9.85 then, the stock price has pretty much flatlined since, which isn't bad considering that other drillers have had difficulty maintaining traction in the current environment. The price of natural gas has gone from stubbornly low to shockingly abysmal.

Though the outlook may be murky, results for the third quarter were clearly superb. Revenue came in at $59 million, up a whopping 61 percent compared to last year. Akita is making hay while the sun shines, using its healthy cash flow to build more pad rigs, on target to have 15 of these in-demand rigs next year.

Finally, a little arbitrage play in Daylight Energy was suggested in October. At that time, it was trading at $9.75, or 33 cents below the price offered by Chinese oil company Sinopec. In our view, doubts regarding this deal passing government muster were misplaced, and the $2.2 billion takeover was completed on Christmas Eve. A 3.4 percent return over a couple of months isn't too shabby.

Gazing ahead to 2012, concerns abound of a European recession, a Chinese hard landing and fiscal nightmare in the United States. If there is any truth to the old investing adage about the wall of worry, we look forward to stocks getting out the climbing gear.


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