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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 loving.

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

Magic Software Enterprises Inc., which we first wrote about in this column 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 Systemswas 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 toFlex 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 and 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. However in 2013, it was decided that perhaps the goal was overreaching and the price 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. First, 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.

Second, 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 a piece of our bread and butter. Next, often 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.

Last, perhaps that initial sell target set years ago 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 attempting 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, albeit they are not ruling out the possibility.

One fixation that has proponents of this firm excited is a two-year-old partnership with Nike Inc. The goal here is to speed up the production process while improving the shoes and lowering costs. Teaming with this shoe giant 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 if 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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