Adventures with turnaround stocks and takeovers
For the first time in years, these contrarians had no takeovers in their portfolios, but they continue to turn big profits with turnaround stocks.
It finally happened. A shutout.
Year after year, the two Canadian contrarians that publish Contra the Heard have had at least one of the stocks in their portfolios taken over.
Not in 2010. But it was an unusual streak anyway, as these investors point out.
In a portfolio of 15 to 25 stocks, it's a lot to expect that at least one will be snapped up.
True, their portfolios are filled with stocks that are labouring to turn things around and whose assets might seem attractively priced to a wealthy suitor.
But still, four takeovers a year from 1997 to 2001 and a grand total of six in 1999 are eye-opening numbers. And there was one a year from 2007 to 2009.
Then zilch. "Drat! Since buyouts generally happen at a lovely premium, they're a fabulous way to grease returns."
And the returns have been very good for the two portfolios followed in this advisory (these investors make no buy or sell recommendations, but rather discuss their approach to investing and the progress of their stocks).
The President's Portfolio returned 29 per cent last year. The Vice-President's Portfolio returned 24.9 per cent.
Of course a takeover remains icing on the cake. A stock that executes a successful turnaround has plenty to brag about in its own right.
We’ll look at a stock in each of the two portfolios. But first, there is one stock in their stable that is in the throes of a takeover, but not soon enough to be counted on their empty 2010 list.
No news is good news
In November, infrastructure software maker Novell (NASDQ-NOVL) put its signature on a takeover proposal from Attachmate Corporation, a private software firm in Seattle owned by an investment group.
At the same time, a group known as CPTN Holdings, which apparently has Microsoft behind it, moved in to purchase Novell patents, chiefly an operating system called SUSE Linux.
Subsequently, CPTN backed off temporarily — in order to ensure that it wasn’t breaking any regulations, so the rumours went. Attachmate was slow to move, too. In this case, rumours suggested it was a little short of the funds required to complete the deal.
The Contra Guys, as they call themselves, wait confidently for the deal to go through, taking the tack that “no news is good news.” Investors should cash in at $6.10 a share.
The market has been a bit slow to come around, as the price hovers near $5.95.
We don’t have to care
The “Vice-President” went south — far south — to make a new acquisition for his portfolio. He picked up the phone company in New Zealand. Officially, it is known as Telecom Corporation of New Zealand (NYSE-NZT).
When is a telephone company a turnaround stock? When it loses its monopoly and has to fight back. Once, the phone company could do as it pleased. The Contra Guys refer back to Laugh-In, and Lily Tomlin’s character Ernestine, the insolent operator.
“We don’t care. We don’t have to. We’re the phone company.”
Now this telecom’s CEO, Mr. Paul Reynolds, has targeted NZ$100 million in savings. “Speak to seasoned managers at BCE,” say the contrarians, “and they will tell you they have already seen that movie. Losing a monopoly is no fun at all.”
So the company must set competitive prices for data lines. “And internally, it means bloated fiefdoms must be cut down to size and managers have to do more with less.”
BCE wasn’t quick on the uptake, they note, but eventually got it right. “The view from here is that New Zealand’s isolation will discourage competition, so the company should do okay in the long run, despite the difficulties of transition.”
The Vice-President did see crowds of shoppers at the telecom’s retail outlets, swarming around Android smart phones. Just anecdotal evidence, he admits, but a good sign. The stock is fairly close to its 52-week high, at $8.61, off a low of less than $6 in the spring. The yield is high — perhaps a bit too high — at 7.1 per cent on a $0.62 dividend.
Hotter than climate change
Contarians these investors may be, but that doesn’t mean they turn away from popular sectors. Thus they “continue to navigate the fertile fields of the agricultural sector.”
The President’s Portfolio in Contra the Heard contains Hemisphere GPS (TSX-HEM), which has been “hotter than climate change.” Early in January the stock shot up to $1.57. It has since settled down to $1.45. It does not pay a dividend.
As its name suggests, the company supplies Global Navigation Satellite Systems (GNSS). Farm vehicles and machinery are not its only market, however. It also supplies systems to the oil and gas, marine and aerospace industries.
It has lost money steadily, thanks largely to its Research and Development costs, point out the Contra Guys. “Maybe more focused spending is in order,” they reflect.
On the other hand, it pulled in record third-quarter revenue and the balance sheet is “squeaky clean.” As farm revenue keeps going up, so should this stock, the contrarians reckon.
“Insiders appear confident, pumping in money, apparently believing that a turnaround is in store, and perhaps sooner rather than later.”
A takeover is certainly a welcome bonus for any investor, but when you’re piling up double-digit returns, you can always wait ‘til next year.
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