has been a fascinating quarter for the Contra portfolio. Of the 31 stocks
with which we began the period, four received takeover bids: Cambridge,
Noma, Royal LePage and UniHost. Three of these were at substantial premiums
to their prices in the past 52 weeks, and far above our purchase price.
Two other Contra positions, Navistar and Spar are also being affected
by takeover vibes and have moved up smartly. During each of the past
eight years, Contra stocks have received takeover bids. One of the questions
weire often asked is: How do we spot these takeover candidates before
they come into play?
explanation is certainly not magic. It is simply a confirmation of our
investing style, ie buying undervalued, underappreciated assets, which
other shareholders have decided to part with at fire sale prices. A
large proportion of these purchases are consummated during the tax loss
selling season when a couple extra percentage points can be picked up
as people do their very late, year-end tax planning.
are some of the specific things my partner, Ben Stadelmann, and I look
for? Book value is a key indicator. Within this parameter we try to
diagnose if the book value is "real" or not. Since most companies we
purchase are out of favour, with many of them experiencing financial
difficulties, often write-offs are pending. These might be because of
layoffs, a re-evaluation of assets, an overabundance of goodwill on
the balance sheet, or for sundry other reasons. We know though, after
calculating a book value, which we perceive is fair, and if this value
is higher or near the price the stock sells at, then our purchase will
likely have good value. That means that other companies within the industry,
who are assessing the competition, or related firms for a good fit,
might also eventually "discover" this enterprise.
course, many other considerations are taken into account. Positive cash
flow is an important sign. Some companies operating at a loss, even
during the lean times, still have more money coming in than is being
dispensed. Often investors ignore this fact, concentrating their sights
simply on the fact that the business is losing money. This tunnel vision
obscures a complete look at the operation.
key indicator is debt. As I outlined in my last piece for MoneySaver,
we attempt to buy firms that are debt-light or debt-free. Many times,
these companies also have substantial cash on hand. The combination
of these two makes the firm an attractive takeover proposition.
companies we purchase, while not mega-giants in the way of a Microsoft
or GM, are nonetheless large players in their fields. Noma, Royal LePage
and UniHost all fall into this category. For firms striving for fast
growth, cherry picking a large player in the industry not only lessens
competition but allows for economies of scale to be achieved in a short
period of time.
we watch to see if insiders are accumulating positions. This was the
situation both with Cambridge and Spar, and in the former case, we highlighted
this to our readers a couple of months before the Cambridge bid.
a takeover is announced, it is rare that we sell before the acquisition
is completed. There are three reasons for this. Often, the bidding firm
will either up its offer, or another suitor will join the fray. Second,
normally the best price one can receive in the open market is less than
the acquisition price. In cases where the stock price is higher than
this, it is usually an excellent indicator that an increase in the bid
price is expected. By tendering rather than selling into the market,
no commissions are paid.
caveat of particular importance: we never invest expecting a takeover
to occur. Sometimes, a company has put itself into play in the past
with no takers, or there are rumours that a suitor is considering a
purchase. While these can be factors when a Contra purchase is made,
it is only a small weighting within our decision parameters. Our investment
strategy is never based on making a short-term killingnalthough sometimes
we do get surprised, for example when Royal LePage was swallowed within
three months of our purchase at a 75 percent premium.