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  From value to Momentum

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR

Tuesday March 6, 2018

In our November column about Flex, the longest-held investment in our portfolio at more than a decade, the focus was on patience.

We also touched on Cambridge, Ont.-based ATS Automation Tooling Systems, the second-oldest, and a company that we wrote about almost exactly six years ago. If we had our druthers, this enterprise would have exited our holdings and only be seen through a happy retrospective while gazing through the rear-view mirror. Alas, such is not the case.

When our toes were dipped into this company, it was primarily because of the excitement surrounding the burgeoning field of solar and its Photowatt subsidiary. Evidently, joining this sector’s excitement proved foolhardy and this organization soon declared bankruptcy, leading to writedowns tallying more than $100 million.

Fortunately, ATS had other operations that were doing quite well, keeping it afloat. Nothing, however, has proved good enough to create a bridge between our average purchase price of $7.06 and the initial sell target of $22.24. The stock has never gotten close, with its best run recently, which currently has it trading around $17.50.

Might ATS’s time have finally arrived?

The past quarterly results were excellent. Revenue was up 17 percent year over year to $278 million. Profit was around $15 million. The forward-looking numbers were superb, with the backlog up 9 percent, to $689 million.

ATS does not have a squeaky-clean balance sheet. There is long-term debt of $306 million, but that is not heavy given the $308 million in the bank, revenue tally and unutilized credit of $644 million. There is sufficient firepower for potential acquisitions.

ATS has moved up handsomely in the past six months from just more than $12. While we have zero desire to add to our current position, this entity might hold appeal for momentum players.

While the stock price of just less than $40 that was achieved after the millennium seems like forbidden candy, achieving our initial sell target seems quite reasonable, especially if markets continue their upward trajectory.

This also happens to be the kind of sizeable corporation that attracts institutions, stock-brokerage firms and mutual funds at around the current price point, potentially driving the valuation higher.

It is fair to say that the majority of investors who pick individual stocks do not have the stomach for decade-plus hold times, but if gains are stellar, that can prove particularly tax-efficient.

Years ago, the average business stayed in the portfolio for about three and a half years, but a decade or more is not unusual. If ATS and Flex are finally sold, the next-oldest holding is a relative youngster from 2010: General Electric. At this point, the endgame of a sale for that stock on a big winning note seems very distant. We’re prepared for a lengthy soap opera.


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