The Globe and Mail

  Six lessons and a 473 percent return


Friday, November 1, 2013

According to Confucius, “By three methods we may learn wisdom: First, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest”. We have a few scars to vouch for the last of those, though this article is about a happier occasion. One of our aims with this column is to share some of the things that have worked and not worked for us, so that readers might have an easier road to improve their returns.

In September we sold our position in Intertape (ITP-TSX) at $15.24. It was purchased in 2007 at $2.66 for a total return of 473 percent. That is a dandy result in any investor's book, but what can be gleaned from this ride that might be applied in the future?

With cyclical companies, buy low and aim high:
That target price of $15.24 was set the day we bought it. Often our targets seem other worldly but in many industries the amplitude between booms and busts is huge. Even just capturing a portion of that swing can yield a multi-bagger if an investor has the patience to hold for several years.

It's okay if none of your friends have heard of your stock:
Let's face it, producing tape is boring. But not all worthy investments can be in industries with cool products and legions of fans. When people “buy what they know”, they tend to gravitate to enterprises that are not just familiar, but inspiring. That leaves less attention for the mundane, but essential components of our industrial economy. Investors can find superb opportunities in these backwaters.

Buying too early is annoying, but not fatal:
When we bought Intertape it was definitely experiencing difficulties, but a turnaround appeared to be in the offing. That turned out to be far too optimistic, especially when the recession bit hard. The stock cratered to $0.39, representing a paper loss of 85 percent. That wasn't fun, but it did not negate our assessment that the company had the capacity to survive and prosper. Of course, shrugging off a pothole doesn't work if it generates a highly inconvenient margin call, a key reason we always pay for stocks in full. The Contra Guys are very debt averse.

Don't overweight a single potentially negative factor:
When CEO Mel Yull passed the torch to his son Greg, we were not impressed. The probability of finding the best-suited person to lead a corporation from within one's immediate family is infinitesimally small. But though we loathe nepotism, it is simply one facet among many to be weighed. As it turned out, the younger Yull has been an able manager with an emphasis on cutting where necessary, while also developing and bringing new products to market.

It's not just what your company does, it's what competitors do:
Intertape is far from being the dominant player in its industry. Indeed, that distinction belongs to 3M (MMM-NYSE). When the U.S. giant decided to go after market share by keeping prices down, Intertape was stunted by thin margins. When 3M shifted strategy, and competition eased, more sunlight made it to the forest floor. This change was mentioned during an AGM, a very worthwhile event to attend when thinking of buying into an enterprise, or when a stakeholder.

Beware the head fake within a bull run:
When a turnaround takes hold, the price of a recovering stock can accelerate rapidly. This was the case last year when ITP ran steadily upwards from $3.31 in January to $9 in August. Over the following few weeks it rapidly lost altitude to $6.50. From a technical perspective, it looked like the stock had broken its trend, though the fundamentals remained sound. A prosaic explanation is that investors simply took profits on a hot stock, and the dip was self-reinforcing as trailing stops were executed. A long-term view helps to ignore these temporary perturbations.

Intertape was an exceedingly successful pick, but over the past two decades we have had many home runs and grand slams with even greater returns. In our contrarian methodology, we strive for big winners because it is these multi-baggers which make up for the inevitable misses. It is a key part of the 15-year annualized return of 14.9 percent on the Contra the Heard portfolio. 2013 should improve that figure, the year-to-date return is 39.7 percent.