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Two Buys with Zero Long-Term Debt

Benjamin Gallander

At the end of the year, the two Contra guys (Ben Stadelmann and myself) were scouring the New York Stock Exchange, seeking a couple of bargains that others were tossing for tax loss sales.

Per usual, we were seeking some home run balls that would run for big gains. This means that we search for turnaround situations in companies which are currently unpopular, but likely to regain lustre in the near future. They must be a minimum of ten years old, and selling near annual lows, with a minimum of a 50% upside. Key to our thinking was finding companies that can survive a possible economic downturn and have stellar balance sheets. This methodology often allows us to purchase takeover candidates well before this happens, creating higher financial returns.

Molecular Biosystems
The first company discovered was our first purchase since last May. There was a time, not so long ago, when Molecular Biosystems (MB) was a sexy biotech stock. But lately, the company, which develops ultrasound contrast imaging agents, has been about as attractive as oversized jeans and beer guts at the fitness club. Investors who had aggressively averaged down as the stock began its swoon, quickly found that the stock was going lower Oe much lower. This set up a crescendo of tax selling activity, allowing us to buy in at less than $3.00. Our target sell price is in the double digits.

A few familiar faces showed up at this fire sale. Our "old buddy," the State of Wisconsin Investment Board was prowling the Contra watch list again. The pension manager now owns 2.9 million shares, or about 15% of the total. That sure whips our moderately weighted buy.

Perhaps, like us, they are encouraged by the companyis assortment of proprietary products, licensing agreements, minimal long-term debt, and moves to beef up management and reduce costs by outsourcing manufacturing. The latter will lead to a write-off as about 25% of the workforce (40 people) will be released. There is also good reason to expect that the long, murky legal battle with rival Sonus Pharmaceuticals over patents will finally get wrapped up.

Biotech is not an industry known for patient investing. Total revenues which topped only $3 million in 1996 exceeded $10 million last year. Some people forget that it takes time for new products like flagship Optison to be accepted by doctors and lab technologists. And small niche operators do not have the muscle for promotion like a giant such as Abbott Labs. Sales in other countries must also wait for various regulatory approvals. This year revenues should easily exceed the $20 million mark. Weire betting that a little patienceoand a bargain priceowill make MB a handsome investment.

QMS
The second firm we purchased has been in our scope for years. QMS engages in the development, manufacturing and servicing of computer printers. They are a small player in a highly competitive industry. Some poor management decisions, particularly relating to sales team restructuring, led to revenues being knifed by more than half and a flow of red ink. Recently though, with an altered direction, sales have begun to increase and earnings have turned moderately positive.

Historically, QMS has focused on quality printers, priced in the medium to high-end range. Recent moves are making their products more competitive at lower prices with many considered at the top of the class in their sales range. With computers and associated peripherals certain to remain a major consumer item, printers today register as a necessity. And with steady improvements in technology, the upgrade cycle keeps bringing people back for the latest and greatest.

The book value of QMS is about 75 cents less than our buy-in price. Debt is negligible. Sales for the year tally in at about $133 million with earnings of 17 cents per share. Managementis vision seems clearer, after their earlier distractions. As the stock currently trades below $4.00, hopefully weire right, as our target price of $8.75 is a few steps away.

Editor's note: It seems fitting to introduce Benj's column now as he and his partner Ben have recently made their first purchase since last May. Hereafter, Benjamin will keep you updated on their portfolio.

Published March 1999, Canadian MoneySaver, Practical & Profitable Financial Advice Since 1981.

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