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Income trusts and other exciting players from the farm system

These Canadian contrarians have had a thrilling ride with a group of income trusts and stocks they hold outside of their regular portfolio.

Some investors can’t wait to get their money out of “boring old GICs” and into more exciting investments.

Others, of course, have had more excitement than they can stand and would rather have nothing do with the stock market just now, thank you.

We’re here for excitement.

We get it from the contrarian investors who publish Contra the Heard four times a year. These fearless Canadian investors have a portfolio of turnaround stocks they follow through thick and thin.

The “Contra Guys” offer no buy, sell or hold advice. Instead, they invest in stocks and comment on their progress for those who wish to follow a contrarian philosophy.

And outside their regular portfolio, there are other stocks and income trusts that one or both of the guys hold. That’s where we turn today.

These stocks might some day make the main portfolio, but for one reason or another, they didn’t fit the needs of the portfolio when they were bought. But they did promise an exciting journey.

“Think of ‘em more as the farm system than the Island of Misfit Toys,” say the Contra Guys.

The lineup starts with a passel of income trusts they bought. We’ll begin with the most recognizable of the group.

A major league player

There’s one income trust in the Contra Guy farm system that many would consider a major league player.

RioCan REIT (TSX-REI.UN) dropped from $20 last year to its current price of $13.98. But occupancy rates in its buildings remain high at almost 97 per cent, rents have gone up and distributions were increased for the 15th straight year.

As a real estate investment trust, RioCan will not have to convert to a corporation, which gives it decided tax advantages. The Contra Guys ask: Are likely declines in real estate values and occupancy rates already reflected in the reduced unit price? And will the distribution be maintained?

They answer themselves in the affirmative. “CEO Edward Sonshine founded RioCan amidst the retail wreckage of the early 1990s. That experience, plus his decision to cut expansion in 2007 due to an overheated market, should help ride out the current contraction.”

Now we turn to some trusts that offer a somewhat more white-knuckled ride — including one that has just changed its spots.

An intriguing buy

One down-on-the-farm player that both the Contra Guys own is Hartco Inc. (TSX-HCI), which they describe as “a delight, going back almost three years.”

As the jargon of the tech industry has it, Hartco “provides solutions” in information technology. As Hartco Income Fund, it kept a stable distribution of a nickel a month “on purchases that were all at $3.46 or less.”

In February, it announced that it would convert to a corporation ahead of the tax changes mandated for 2011. The prospects for the dividend became murky and the price dropped to $1.56 (but has since recovered to $1.75 as the conversion was completed on April 15).

A distribution is being paid in April, but the fate of the dividend is still unclear. “While it wouldn’t surprise us to see the dividend suspended for a period after the corporate transformation, management and employees would surely like to see it maintained, given that they own much of the company,” say the Contra Guys.

“Although Hartco will be operating in a declining market, this one has an excellent chance of appreciating in the longer term. Therefore, it remains an intriguing buy.”

No such luck for the next trust.

Praying for the distribution

True Energy Trust (TSX-TUI.UN) is an example of the perils of contrarian investing. Both Contra Guys owned this exploration and production oil and gas trust. At the wrong time.

The price was “careening downwards, and deservedly so.” So they bought in again, and it kept going down. “Worse, the lovely distribution is now zero. This is an ugly tale that could end in bankruptcy unless some assets can be sold.” But they’re not quite ready to send it to the Island of Misfit Toys. They’re still holding — but doing no more buying.

The outlook is brighter for Macquarie Power and Infrastructure Fund (TSX-MPT.UN), which participates in infrastructure through gas co-generation, wind, hydro and biomass power generation.

The unit price was over $8 a year ago and now sits at $5.87. The yield is a handsome 18.2 per cent. “We’re holding and praying the distribution doesn’t get cut,” say these investors. So far, so good — the annual distribution is holding at $1.05.

Big possible gain

We can’t cover the entire farm system (and some of them, frankly, look like they’re never going to make it out of the bush leagues). But one more stock caught our attention.

To help take the edge of the inevitable losses they have incurred of late, the Contra Guys returned to an old favourite, Brick Brewing (TSX-BRB). They originally bought it at 67¢ and it quadrupled in price between 2003 and 2005.

“Brick is struggling, but given the rate at which champagne is giving way to beverages sold at the ‘legal minimum price,’ this one could end up as a lovely winner.” Brick is “financially cornered,” they warn, but they continue to quaff its products and stick with the stock. They bought it for a quarter a share and it now trades at 63¢.

The fact is, the Contra Guys aren’t the least bit intimidated by this treacherous market. “Ultimately there are more stock opportunities out there with BIG POSSIBLE GAIN written all over them than at any point in our lifetimes.”

It all comes down to how much excitement you can handle in the search for profits — and whether you’re ready to take a chance on a few promising players up from the farm system.