Following the leaders not a surefire strategy

Benj Gallander and Ben Stadelmann
Friday, August 17, 2012

Two related strategies often used by investors are to follow the person who has made them money in the past or is a renowned investor with an illustrious record. We have employed these methods ourselves, anticipating that lightning would strike twice. Unfortunately, at our end it has not proven successful.

A company where we made a nice pile of change was Leitch Technologies. We had watched it for years and when Tim Thorenstein became CEO, decided to jump in. Purchased at $4.82, this was sold when Harris Corporation arrived with a bid at $14.

Later, Thorenstein became the head honcho at Enablence Technologies, and our hope was that lightning would strike twice. It did not, yet we got burned. He recently left the company, and it currently trades at around a penny. It could easily enter into oblivion around the same time as that coin’s retirement.

Jos Wintermans was the leading man at Sodisco Howden when procured at $1.19. He ran a fine ship during the turnaround and the company became attractive to CanWel Building Materials, who ponied up $3.25 a share.

Next, Jos took the reins at Cygnal Technologies. That company floundered and we took a nasty beating while learning some valuable lessons. Eventually, the firm morphed into Connex Technologies.

Robert Burton was our man when the Moore Corporation was acquired. This enterprise had been in the doldrums for years, and was seemingly becoming less relevant in the dot-com age. But Burton waved his magic wand and performed a masterful turnaround that led to a takeover by RR Donnelley.

Unfortunately, his next attempt at resuscitating an enterprise, Cenveo, has been mired in quicksand. Though revenue has increased somewhat, the bottom line has been mostly red while the debt level has remained stubbornly high.

With $8 billion in liabilities and its junk rating, it will be tricky for the company to avoid filing Chapter 11. Currently trading around $2, this is not far off its historical low. Fortunately, though the tires were kicked quite seriously on this one, we did not buy in.

Sun Bancorp was acquired for the Vice-President’s Portfolio at $3.90. The key attraction was that billionaire and turnaround artist extraordinaire Wilbur Ross had bought into the company. The logic was that his long coattail would lead to a hefty spin to a successful company.

While we would be fools to count Wilbur out, more than two years after being acquired, it sits under $3. Being patient investors, this one will rest in the portfolio and remains a “Buy.”

A primary error made when utilizing the “Follow the Leader” strategy was being overly emboldened by previous success and not paying enough attention to the financials of the company being analyzed. In the future, when this methodology is used, remaining vigorously attuned to the other necessities comprising the recipe for a turnaround will be a must. Management that has proven successful previously will be only one ingredient in the purchase formula.

We, too, have our followers, many of whom tumbled off the Contra bandwagon after the lambasting our stocks took along with the rest of the market in 2008.

Fortunately, that shellacking is now somewhat distant, and while markets have not performed well, the past four years have been exceedingly kind to our returns. That is largely because the beating taken both expanded our knowledge and refocused us on the absolute necessity of being exceptionally disciplined.