Our return for 2005: 24.3%

Benj Gallander and Ben Stadelmann
Monday, January 16, 2006

The final 2005 performance numbers for the Contra the Heard portfolio are in. The tally was a return of 24.3 percent, and that is after accounting for the 3.2 percent nip taken by the decline in the American dollar.

This raises our five-year return in rather dramatic fashion to 40.0 percent, as the nasty -17.4 percent of 2000 has now been removed from the calculation. The 10-year landscape is beautifully stable: that number has improved slightly to 26.2 percent. Those numbers will be tough to sustain given the possible storm clouds on the horizon.

In our last column on GlobeinvestorGOLD.com, we did a roundup of Canadian stocks that were covered over the past year or so. Now, for the grand finale of 2005, the focus is on US companies that were featured.

Last summer the tires were kicked on out-of-favour large telecoms, including Lucent, then trading at $2.85 (US).

Despite improvements in 2004, our concern was that the recovery would stall and that the sector could be heading towards a double bottom.

Though the stock did rally nicely in the fall to $3.50, the corporation is in the news again, and the refrain is a familiar one: revenue forecasts for 2006 have been cut due to a difficult sales environment in the United States and China. That gloomy outlook chilled the stock back to $2.65.

Though this telecommunications equipment maker looks cheap by some metrics, it is still unattractive to us at that price. Aside from the glitch in revenue, management looks weak and the company is giving them far too many stock options.

The possibility of a stock consolidation has also been raised again — some analysts think the outfit would be more palatable to institutions if priced over $5. Yeah, whatever.

Last June, when it was trading at $282.50, we wrote of our glowing admiration for Google. It’s not one we own (dang it!) — indeed, the company is the antithesis of a Contra stock in many ways — but it was an interesting one, especially since fellow contrarians such as Seattle’s Bill Fleckenstein had tried shorting it. Bad idea.

Though our prediction that the uber-searcher would be added to the S&P 500 index has not happened — yet — the company’s management has a contrarian bent, and piles success upon success by doing the unexpected.

Eventually the “law of large numbers” will pressure Google, forcing the growth rate to moderate. While the current astounding price of $466 may have a ways to go, it is difficult to fathom a stock that can support a price-to-book value over 15 and an earnings per share over 100. After all, this isn’t the millennium.

Last March we opined on another tech heavyweight, eBay, when it was at $41.75 and falling fast. Though that price was a lot less than days of yore, we concluded that it was no bargain, despite its sexy stock split. About a month later it hit $30.78, once again proving the adage about trying to catch a falling knife. It has popped back to $46.

A real-live Contra portfolio play, covered just over a year ago in November 2004, was Franklin Covey. Trading at $1.75, it was slightly higher than our purchase price of $1.55 in December 2003.

Our prediction that the long famine was about to end was right on the button, as investors gorged on huge gains, with the stock hitting a 52-week high of $8.10.

Though it has cooled off to the mid-$6 range, our target of $11.24, which seemed outrageous to many, is now well within the realm of reason.