Looking back on past investments

Benj Gallander and Ben Stadelmann
Thursday, May 26, 2005

Looking back on past investments can instill an ongoing sense of confidence — and also give pause. Such was the case when we prepared this piece, for way back on December 21, 2000, three stocks were added to the Contra the Heard portfolio in a one-day buying spree when the market was clenched in the teeth of the bear. Fortunately, we did not get sucked into purchasing busted techs, which still had a distance to fall.

One we bought then was the Luscar Coal Income Fund at $1.48. That turned out beautifully, as more than 50 per cent of our position was dispensed with less than three months later at $4.17, when Sherritt jumped in with a takeover bid. The rest was sold at $4 on the tender a few months later.

The second was Shoney’s, a restaurant chain in the United States. Purchased at 37.5 cents (US), our target price of $4.81 was initially considered optimistic by many. As the stock quickly vaulted to $1.35, it looked like ours might be the last laugh. Unfortunately, the company gagged and spewed and the stock price plunged like someone fighting food poisoning. Lone Star Funds moved in to save our bacon at 36 cents, but it left a bitter taste in our mouths.

The third purchase was merchant bank Clairvest Group at $3.41 (Canadian). Those familiar with the old television show Traders might have an inkling of what companies in this field do. Simply put, they form partnerships with established and emerging companies that offer the possibility of an excellent return on capital.

A few of Clairvest’s investments include Gateway Casinos, Datamark Systems Group — which is exploring the possibility of becoming an income trust — and Allied Global Holdings. There are over half a dozen more.

When purchased, Clairvest had a darn good track record. Some big names were behind the firm — a veritable who’s who of Canadian business, including Tom Beck, Michael Bregman, Joe Heffernan, Joseph Rotman, Lionel Schipper and Izzy Sharp. The nine investments harvested by Clairvest had achieved an internal rate of return of 26 per cent.

That was then, this is now, and the entity is not standing still. This month an investment in Integral Orthopedics was announced, which acquired Obus Forme. This appears to be an intelligent demographic play, as the aging population demands orthopedic back care products and clinical treatment solutions for back and neck pain.

In April, via the company’s investment in Wellington Financial Fund II, a privately held specialty finance firm, the closing of a $4.25 million Series B debenture financing for Calgary-based CriticalControl Solutions occurred. This outfit provides proprietary software, integration, consulting and document management services.

Clairvest also announced another normal course issuer bid, and unlike many corporations who just talk about it, they are actually buying back shares, to a maximum of 5 per cent of the outstanding common shares to $10 million.

Over the past five years the stock price has moved up smartly, with the chart a lovely sight. The book value as of the end of 2004 was $12.27, more than 20 per cent higher than the current trading price of $9.80. Profit in the third quarter was 45 cents a share.

The company pays a dividend that is currently a tad better than one per cent. The stock price has pushed passed our initial sell target of $8.70, and we are monitoring it for a sale when it reaches double digits. Normally we sell at least half of our position on achieving the target, but this company’s financials remained too appealing.

While this is definitely not the financial return of Luscar, it will not be a Shoney’s either. One day, three investments, a spectrum of results.