2014 in Review

Benj Gallander and Ben Stadelmann
Friday, January 16, 2015

It’s that time of year when we like to review the companies that we opined on over the course of the past year and see how they are doing.

In December 2013, the coal sector was in deep contrarian territory and Chinese miner Yanzhou Coal, then trading at $9.70 (US), was being examined. The skid continued as cold weather in major Chinese cities drove pollution to extreme levels and the ADRs bottomed at $6.32. Curiously, as soon as spring winds blew away the smog, Yanzhou Coal rallied sharply to over $8.

This one has not been purchased for the portfolio yet, but remains on the Watch List. Currently at $8.21, it will be interesting to see if an attractive entry point again develops when the winter gloom intensifies. With a price-to-earnings ratio of 7.3 and a price-to-book ratio of .62, the valuation remains tempting.

Gold was basically flat in 2014, but many companies in the sector were down double digits.
, written about last February, was no exception, ending the year down 24 percent. Despite the tumble, it reported good third-quarter numbers.

In December, Harmony released a pre-feasibility study for its JV Golpu project in Papua New Guinea. Though many risks remain associated with this project, the asset is world class and could be a boon to shareholders with a long time horizon. The stock price has popped since the New Year, up more than 50 percent.

Last March, Benj took a gander at an American dividend play, Star Gas Partners. The distributor of heating oil and propane had a solid 2014, with annual revenue up 12.6 percent to $2 billion. Net income of $36.1 million was 20 percent higher. The dividend was bumped up to an annual rate of 35 cents per share, giving this stock an attractive yield and the potential for further capital gains.

With Target leaving Canada, it is fitting to review Reitmans, which Ben purchased for $5.51 (Canadian) last February. Although 2014 was harsh to many retailers, Reitmans posted solid numbers in the back half of the year, proving its store closures and turnaround ideas were prudent. Not only did numbers improve, but online sales soared.

The retail landscape in Canada is very competitive. Jacob is gone, Mexx is closing and Le Château is barely hanging on. Reitmans has had huge problems of its own — its Smart Set division will be shuttered. As it restructures and improves its retail footprint, we believe Reitmans can survive and thrive. It remains one of the favourites in the VP portfolio. The stock finished the year solidly at $7.71.

Last May, the much maligned utility Atlantic Power was examined. The conclusion was that the corporation would probably survive, but the danger level was too acute to buy the common shares. That made the stressed debentures a more comfortable choice.

Since then, the common stock is down 8 percent, while the debentures are up slightly. The 6.25 percent coupon gives an effective yield of 6.9 percent. Over the summer, the company was up for sale but found no takers. In September, longtime CEO Barry Welch resigned and the dividend took a 70 percent haircut. Ouch!

An activist investor is again agitating for a sale, but nothing has come of it yet. Selling the debentures at par as part of a breakup deal would be a very suitable end game from this corner.

Since June, First United has traded sideways. As we mentioned in an article last October, we often find that stocks and sectors go sideways after an initial bounce away from the brink of bankruptcy and ruin. That appears to be the case with US regional banks. With any luck, this listless phase will be followed by a powerful move higher.

Also in June, Ben was wrestling with what to do with his position in Calgary-based telecom Axia NetMedia. Though the corporation had executed a significant turnaround, the stock price was stuck under $3 (Canadian) and making little progress to the target of $5.50.

The verdict was that the goal was overoptimistic and a new exit point at $3.25 was set. Although the revised target was hit in late December, it was deemed better to wait to sell until 2015 to defer capital-gains taxes. Given the purchase price of $1.14 in 2011, waiting to year to pay makes a real difference!

As mentioned, small US banks have been listless, but Cascade Bancorp has fallen about 20 percent since it was written about in July. Benj added it to his collection on attractive metrics and strong insider buying. Insiders are still acquiring shares, valuations have improved and the latest results look pretty good. He remains bullish on this one.

Finally, in August we wrote about Rona. Benj invested in the company’s 5.25 percent $25 par value preferred shares. He picked them up in the $18.71 to $19.67 range in 2013, and when the article was written they were trading at roughly $22. Both the common and preferred shares have eased back since then, but Benj is happy holding and reckons that, in time, the preferred shares will trade closer to par.

As for our overall portfolio results for 2014, the President’s Portfolio continues to handily beat the indexes, up 23.9 percent. The five-year annualized return is a sparkling 28.9 percent. The Vice-President’s Portfolio was up a more modest, but still respectable 14 percent. Since its inception in 2010, it sports a total return of 80.1 percent. Hopefully, 2015 brings more of the same!