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  Patience pays

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR

Wednesday November 29, 2017

While cannabis and cryptocurrencies rule the investing and speculating roost, stock markets are lifting the good, the bad and the ugly. In our case, they are also lifting the patient as three portfolio stalwarts held for more than a decade have been receiving some love.

Ten years? Wow, that is a ridiculous amount of time for many people in the world of Snapchat.

Magic Software Enterprises, which we first wrote about in this space in 2008, was finally kicked out of the portfolio in September. The wait was worth it as the $1.81 purchase price morphed into an $8.85 sale, accompanied by dividends along the road. Doug Henning would have approved.

ATS Automation Tooling Systems was acquired at an average price of $7.06. It has spun up to the current level of $16, near its 52-week high. There is still a distance to the initial sell target of $20.24. Evidently, more staying power is required.

In 2006, we purchased Solectron, which about a year later was acquired by Flextronics, a Nasdaq company based in Singapore, since shortened to Flex Ltd.

Our feeling at the time was that this design, engineering and manufacturing outfit was a fine contrarian pick with lots of upside potential. Apparently, we were wrong; we ended up sitting on dead money.

However, all of a sudden there is life in the old dog!

Acquired at a price of $9.01, our initial sell target was set at $28.24. In 2013, it was decided that perhaps the goal was too much of a reach, so it was dropped to $18.74.

Lo and behold, the level was breached last week, but a decision was made not to sell at this time. One could easily argue against that choice. Insiders have been selling bags of shares. The book value is less than one-third the current trading price. The corporation has a history of shooting itself in the foot.

Our normal discipline is to sell at least part of a position when the objective is reached, but there were a number of reasons to wait.

We do not like to sell winners in the last couple months of the year. By waiting until 2018 to say, “Bye bye, Flex,” taxes can be deferred. This keeps more money in our pockets to use and earn more — kind of like the power of compound interest.

A 10-year stock chart shows us that the stock far more often than not does well through the year-end and the first few months of the following year.

While some analysts dislike this kind of timing, it is part of our bread and butter. Institutions and money managers want to finish a year where they can show off companies that have been winners, so they buy enterprises like this. This "window dressing" pushes up prices.

Finally, perhaps that original sell target was not so silly. Given that the corporation used to trade at that height back in the early 2000s, it can’t be characterized as pie in the sky. Our rhetorical question has been whether too much pessimism took hold among us, given the poor performance after we bought in.

Management is trying to return value to shareholders via a share buyback. The count has dropped from 821 million in 2010 to 528 million today. We would prefer a dividend, but the head honchos have disagreed with us, though they are not ruling out the possibility.

One fixation that has proponents of this firm excited is a two-year-old partnership with Nike. The objective here is to speed up the sporting-goods giant’s production process while improving the shoes and lowering costs.

Teaming with this colossus was a coup for Flex, and though it is a long-term process to get production up and running, it could prove very lucrative if all works according to plan.

We should know by the spring whether the decision to hold was a wise one. If wrong, let’s hope it will not mean another decade of holding this entity. While endurance can be a plus, too much can be like running in mud.


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