The contrarian investor’s guide to selling, holding and buying
Turnaround stocks can pay off for patient investors, like two Canadian contrarians who explain their decisions on a sell, a hold and a buy.
“What kind of fish can perform an operation? A sturgeon!”
“What do you call a fish with no eyes? Fsh.”
“Why did the whale cross the road? To get to the other tide.”
We take no responsibility for this barrage of fish jokes. They come from the Canadian contrarians that publish Contra the Heard.
It is their way of telling their readers they are selling High Liner Foods (TSX-HLF) after holding the stock for many years.
These two investors are not recommending that anyone else sell the stock. Or that anyone hold or buy any of the other stocks in the two portfolios they maintain.
Their mandate is simply to comment on the progress of their portfolios four times a year for their subscribers. Pursuing turnaround stocks often takes you down a long and winding road. But it can pay off.
On the front of this advisory, we see the following returns — 15 years, 16.6 per cent. 10 years, 14.3 per cent. Last year, 47.4 per cent.
So let’s pick up the pursuit ourselves, with a sell, hold and buy.
No more fish jokes
When the Contra Guys (as they call themselves) bought High Liner, it still went under the name National Sea. The shares were at $5.94.
“Now, 17 years after the purchase, there are no more fish jokes on the menu,” they conclude ruefully.
At the beginning of this month, the shares traded at $11. Over the years, they rarely swam higher than that. In short, they have not quite doubled in more than a decade and a half.
“We can understand why people would hold this stock, or buy it. The dividend is a very reasonable 2.7 per cent. The company seems to think that the smooth sailing will last, that the compass needle points toward additional capital appreciation.”
But sometimes, you just feel that you’ve gotten everything you can get out of a stock. These investors conclude that, “after our lengthy voyage, we’re ready for shore leave.”
For the record, the shares are at $10.78 today and yield 2.8 per cent on the $0.30 dividend.
The cream of wheat
Another stock these investors have been keeping for five years is staying in the barn, so to speak. It’s Viterra Inc. (TSX-VT), formerly known as the Saskatchewan Wheat Pool.
This is an ambitious company run by a man the Contra Guys call “the cream of wheat,” Mr. Mayo Schmidt. And he’s “a man with vision (hey, you don’t become Canadian Business’s Top CEO without it).”
Mr. Schmidt wants Viterra to become a global player in agribusiness, they add, and he’s doing it aggressively through acquisitions.
This policy got investors excited enough to kick the price up to $13.45 in early 2008, at which point these contrarians sold 55 per cent of their shares. “But things have cooled off since — perhaps the market has shared some of our concerns about this strategy.”
Its biggest recent purchase has been ABB Grains of Australia, which promptly repaid Viterra by breaching its financial covenants. But there was enough cash in the coffers to deal with the problem.
This month, it jumped in again, buying Dakota Growers Pasta Company in an all-cash deal.
Viterra’s fiscal 2009 had its ups and downs. The first quarter of 2010 brought the Australian operations on board, which has increased revenues. And its risk profile appears to be improving, as Standard and Poors upgraded its credit rating from BB+ to investment grade.
“Viterra is a well-known and actively traded stock, but the share price has been stuck in the muskeg,” conclude these investors. “Still, almost everyone seems to like the long-term outlook for the company. Perhaps one day, with a bumper crop and robust demand from Asia, our sell target of $12.74 will be surpassed once again.”
They are holding the stock, which trades at $8.77 with no dividend.
A bright future
Another stock that’s determined to grow by acquisition rates a buy. ATS Automation Tooling (TSX-ATA) recently bought Sortimat Group from Germany for some $51 million in cash.
Sortimat designs systems for the medical product and pharmaceutical device markets, and most of its revenues come from Europe. “So if you like health care and you like Europe, then you like where CEO Anthony Caputo is going with this.”
The company’s most recent results, add the Contra Guys, show that global economic conditions have not “swiftly turned a corner by all means.” Business is still volatile for its Automation Systems unit and Photowatt Technologies Division.
Sales were up for both divisions, but ATS is still dealing with tight credit markets and hesitant customers spreading out their payments.
The company has revived the idea that it might spin off Photowatt or sell it outright. This could be good for shareholders “because each unit would become a pure play, and thus become easier to value.”
In the meantime, Photowatt is seeking to cash in on the Ontario government’s offer to buy surplus electricity from owners of solar panels at a premium rate. The majority of the equipment must be made in Ontario, and Photowatt is making its products in Cambridge, Ontario.
This stock is in both of the advisory’s portfolios. “It’s profitable and management has our full confidence,” say the Contra Guys. They concede that economic conditions could still cause problems.
“Without ruling out the possibility of a few aftershocks, which would affect ATS, there are enough favourable aspects for us to envision a bright future for the company.”
It trades at $7.52 and pays no dividend.
With the Stanley Cup playoffs in full swing, it seems appropriate to end with one more fish joke from these unrepentant contrarians.
“What kind of fish is useful in freezing weather? Skate!”
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