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  Better off than four years ago, but not without learning some lessons

BENJ GALLANDER and BEN STADELMANN

Thursday, November 1, 2012

One question regularly bandied about during the U.S. presidential race is, "Are you better off now than four years ago?" The Republicans particularly like to pose this one, as they recognize that a large swath of Americans are struggling along, many from paycheque to paycheque, many unemployed without even the pittance of a minimal salary.

When George W. Bush left office four years ago, the American economy was in a major downward spiral, much of it caused by his own dismal stewardship. This vortex was of such negative force that, irrespective of who came to power and what decisions were made, it would continue to grind America downwards for a number of years. Quite simply, it is virtually impossible for Americans overall to be better off now than when President Obama was elected.

Unfortunately, Benj continues to hold some positions, purchased in 2008 or prior, that have done exceedingly poorly. Quite simply, they might have done badly even if the financial system had been thriving. In the parlance of callers to the Business News Network, the question about each of these might be, "Buy, sell, or hold?"

One is Andrea Electronics, bought in December 2007 at a nickel a share. The idea behind the purchase of this manufacturer of microphone technologies was that the stock price spiked every few years before quickly settling again to its moribund status.

Indeed, in both 2009 and 2010 it did better than a double, but Benj was not nimble enough to sell. The listing on the Wild West show of the OTC made this doubly difficult, as this market is not what one would call transparent.

Andrea regularly has annual revenues in the range of $4 million to $5 million. The company has a clean balance sheet with no debt and a couple million dollars in the bank.

Unfortunately, it regularly loses money, albeit from about $500,000 to almost break-even. One problem facing the company — and shareholders — is that the executive chairman/chief executive officer/president/secretary, Douglas J. Andrea, grabs a salary in the $350,000 range. That makes profitability difficult with such meagre sales. His compensation would jump handily if he could capitalize on his stock options.

Andrea continues to introduce new products in this competitive field, announcing this month the SuperBeam-805 CANS headphone. While this will not be a game changer, perhaps it will generate enough revenue to cause another stock price spike. Benj is not holding his breath. At this point, he will "embrace" his position and hope to sell at a dozen pennies or so.

One major difficulty in selling is that the stock is pretty illiquid, trading an average of 13,000 shares a day or so over the last three months. As with many companies that trade by appointment, the number can climb into the hundreds of thousands of shares, but those days are few and far between.

Another company bought in late 2007 was Opawica Explorations, which at that point in time was listed on the TSX. The fact that it is now a Venture company clearly indicates that it has not done well. It is akin to playing for the Toronto Blue Jays and being demoted to the New Hampshire Fisher Cats.

OPW has done pretty much bupkus since being acquired for seven and a half cents. Sure, some properties have been sold and others optioned, and there have been private placements and a stock consolidation of one for 10. However, at the end of the day, the stock is trading at three and a half cents, well below Benj's purchase price, given the consolidation.

Fortunately, he sold about 75 percent of the position when the consolidation was announced, eating a loss of 20 percent. The rest of the stock was not swallowed by the market.

What to do now with this position? Well, this dismal result, along with other purchases over his career, has convinced Gallander to avoid the Venture exchange. That does not mean that lots of money cannot be made there; simply that he will not make it. Or lose it.

OPW will sit in the Hold camp until the company has an amazing strike, boosting the share price, or the story simply becomes yummy to investors for some reason, allowing for a sale at a higher level. It would be sold for a tax loss if it were not in his RRSP. No Freedom 55 for this Contra Guy!

Last is an outfit that we wrote about in January, DLH Holdings, formerly known as TeamStaff. This one has been a disaster, purchased at $1.25. Now it trades just north of a buck, which does not sound so bad until the one-for-five consolidation is taken into account. Yuck.

While Benj still believes in this company, which provides healthcare delivery solutions, the turnaround is taking way longer than expected. Plus, there is a major danger that, if the stock trades at under a dollar for 30 days, the Nasdaq people can come calling, looking for a solution to get this one back above the penny level. If an adequate plan is not forthcoming, this issue could find itself on the OTC or pink sheets, a demotion that is rarely kindly to a stock.

DLH has signed numerous deals and seen a growth in its backlog. But after years of promises, the proof will have to be in the pudding. Fortunately, there is only nominal debt on the balance sheet of less than $3 million, a bit less than cash in the bank account. But the company regularly loses $4 million to $6 million a year, a trend that must be interrupted by black ink for the company to return to prior form.

Insiders are well vested, having been big buyers recently and owning over 17 percent of the shares. Even with the recent share offering, there are only about 9.3 million shares outstanding. Given the years of failure, this position will stay a Hold, with no more being added to the coffers.

So is Benj better off than four years ago? By all means, yes. Unfortunately, some positions are well underwater, and while a piece of change might be returned eventually, ultimately the value in these three lies in the ongoing learning curve.

Meanwhile, America's 400 richest Americans have been recovering. Their net worth grew 13 percent last year. Given that their total net worth is about one-eighth of the U.S, economy, it really does not concern us whether they are better or worse off than four years ago.


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