Tip-toe thru the markets with us

Benj Gallander and Ben Stadelmann
Wednesday, August 15, 2007

As stock markets took a lashing, our thoughts turned woozily to Tiny Tim, his ukulele and the campy classic, “Tip-toe Thru’ the Tulips with Me.” Those of the younger generation may not remember this long-haired performer whose fame took him to Laugh-In and the Ed Sullivan and Jackie Gleason shows, amongst others. But perhaps the highlight of his career was when this mid-40s gent married teenager Miss Vicky on Johnny Carson’s show before a record number of viewers. Wow! Eat your heart out, Beniffer!

At this time, we are tiptoeing through the stock market. Our Contra the Heard portfolio has only 15 stocks — the lowest number since its earliest roots and at the bottom of the 15 to 25 register we seek. In fact, this year we have only purchased a single position for the stable and that was a special situation.

How come? The answer is simple. There are two sides to the investment equation: making money on the one hand, [i]preserving[/i] it on the other. Our risk-reward assessment has suggested that, given the various problems facing markets, the latter goal currently takes precedence.

However, there is a further reason. Being contrarians, our modus operandi is to attempt to be deep value players. Given the inexorable rise of the markets over the past few years, value has been hard to find. Our Stock Watch List, which a couple of years ago held close to 400 corporations of varying degrees of interest, has dwindled to fewer than 200 entries. The Canadian side has just over a quarter of those stocks, severely hindering our ability to buy in this country.

While prices are downtrodden from a couple of weeks ago, and many analysts suggest they are cheap, our opinion continues to differ. It remains difficult for us to find enticing stocks, and a further blowout would be helpful to remedy the situation. Besides the evident economic difficulties, it is quite likely that margin calls and tax-loss selling will push prices lower. That could help add some sizzle to potential purchases, and lead us to buy a number of positions before the year-end.

What was the special situation that convinced us to buy? It came about when ATS Automation Tooling Systems recently offered rights that could be turned in with $6.23 per share to existing shareholders. The stock price was sitting at $6.71 the day the deal was done, and given the discount to market value, accompanied by our ongoing confidence in the corporation, it appeared worthwhile. This purchase added to our original position, acquired at $10.51 towards the end of 2006. That the stock price is now in the $6.50 range, so the original buy was certainly not fortuitous, and our target price of $22.24 is farther away than ever.

Presently, the Contra portfolio is underwater for 2007. If there is not some improvement, it will represent our first loss since 2000 and depress our 15-year annualized return of 26 percent. While this number will most assuredly drop, the question remains by how much. Fortunately, we have far less invested in the market than usual, so the negative result will not hurt as much.

While many people are delving to buy on the dips, our attitude is to wait a few more months to see what the fall season holds. At this point, we do not perceive the trend to be a friend, and we are preserving money rather than chasing it. For that reason, as others trod in, we’ll gently tip-toe thru the tulips, waiting patiently to find value.