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The London Free Press
June 1, 2004

Contrarian patience pays

By Nancy Carr, the Canadian Press

Back in March 2003, the Hudson's Bay Company reported a drop in sales while management warned the looming war in Iraq could dampen shoppers' spirits. For Benj Gallander, it was the perfect time to scoop up the retailer's stock.

Gallander, a contrarian investor, paid $8.50 for his shares in the country's oldest company, and over the past 15 months they have jumped by almost 60 percent to more than $13.

Last week, the firm slashed its first-quarter loss dramatically to $19 million from a year-earlier $34 million.

Yesterday, the company said it feels financially fit enough to spend $250 million on its Zellers stores this year, a move that boosted share price three cents to close at $13.40.

"People thought this one might go the way of the dodo, given the less-than-stellar results and the competition of Wal-Mart," he said.

But Gallander felt the company's stock was undervalued and that management for the company's Hudson's Bay, Home Outfitters and Zellers stores had a "reasonable plan."

As a contrarian investor, Gallander tries to suss out companies others don't like, but which he believes have good fundamentals and, ultimately, promise upside for their shareholders.

His portfolio has made a return of 29.8 percent over the past five year. It has been boosted by other contrarian purchases such as KLM airlines in the fall of 2002, when the industry was in a slump, and Corriente Resources, which mines copper, a commodity that usually rises in price as the U.S. dollar weakens, as it has over the past year.

He has an MBA and 25 years of investing experience, which he has parlayed into an investing newsletter called Contra the Heard, which he produces with partner Ben Stadelmann.

He has also written several business books.

But he claims anyone who has the time to do the background research on public companies can be a contrarian investor.

"I don't think you have to be a super IQ to do it," he said.

"If somebody takes a few courses and learns how to read financial statements or reads a few books, and really grasps them, it's not that difficult."

The most common way to identify an undervalued company is to look for one with a low price-to-earnings ratio. But aside from a strong knowledge base and a familiarity with numbers, contrarian investors have to be comfortable doing the opposite of what the rest of the market is doing.

"You have to be really independent from what your peers, the media and the crowd are saying, and that is not an easy thing to do," said Patricia Lovett-Reid, senior vice-president at TD Waterhouse Canada Inc.

"A lot of people find comfort going with the crowd. (Contrarian investors) find reasons not to go with the crowd because they honestly believe the crowd is often wrong."

Contrarian investors also need a healthy dose of patience.

"Once we start to watch a company we won't invest in it for at least six months and often its three, four, five years before we'll buy a position," Gallander said.

"We're very patient, and there are always opportunities out there."

Gallander warns against quick stock flipping and investing in companies less than 10 years old. That means he missed most of the tech boom in the late 1990s, and also missed getting burned when the tech bubble burst.

Just as contrarian investors try to buy stocks when they're out of favour and inexpensive, they try to sell them again before they peak. Gallander sets a target sell price, at which he sells half his stock, looking for some more, possibly riskier, upside on the other half.

According to Lovett-Reid, other contrarians adhere to the rule of thumb that recommends selling a stock once it rises by 50 percent, or after three years.

"You don't want to be hanging on to something that may potentially be an underperformer in your portfolio," she said.

While contrarian investing may seem risky to some, financial adviser David Chalmers, with the Rogers Group in Vancouver, said it can play a roll in the portfolio of even the most cautious investor. Hedge funds, which aren't just independent from market hype, but deliberately act in opposition to it, can balance out traditional funds.

If a client's portfolio contains 50 percent fixed income investments and 50 percent equities, a hedge fund might account for about five percent of the equities portion, along with investments in large and small Canadian companies, American firms and income trusts.

Adding a contrarian position, Chalmers said, is simply another aspect of portfolio diversification, which is one of the first lessons in investing.

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