In an upside down market, an inside look at turnaround stocks
Two Canadian contrarians show how to hang in with troubled stocks with an eye to future profit, examining two stocks and one REIT.
It may not seem so easy to define a turnaround stock these days.
You’d be hard-pressed to find a stock that hasn’t been kicked upstairs and down in the last few weeks.
But there is a difference between stocks that are simply being buffeted by stormy markets and those that attract the attention of contrarians.
Contrarians like stocks that are in trouble. Stocks that must roll up their sleeves and apply some elbow grease if they want to see better days.
The rewards can be spectacular. So can the risks.
Four times a year we visit the two Canadian contrarians that publish Contra the Heard. Like publicly traded companies, these two investors make quarterly reports to their subscribers.
The Contra Guys, as they call themselves, do not issue any buy or sell recommendations. They simply recount the experiences they have with the stocks they hold in their portfolios. And they are never dull.
Nor are their results. Last year, their returns were 47.6 per cent. For the past decade, the number is 14.3 per cent.
Today, in a market that seems about as contrary as it can get from week to week, we will examine three stocks (in fact, two stocks and a real estate investment trust) in their portfolios.
These companies are pretty well known, but that does not make them well heeled at the moment, unfortunately.
We begin with one of Canada’s best-read stocks and move on to a liquidator and an owner of many shopping centres.
A Harlequin romance
“If business were like a Harlequin romance,” say our contrarians, “Torstar (TSX-TS.B) would now be happily engaged to the CanWest newspapers and the front pages of The National Post and Toronto Star would be basking in the matrimonial afterglow.
“Alas — or should that be alack? — it was not to be.”
CanWest, of course, was taken up by ambitious western cable giant Shaw Communications.
But spare the violins for a moment, say the Guys. “This may be a case where the failure of the pursuit turns out to be the best possible outcome.”
They like the fact that Torstar and its bankrolling partners, Fairfax Financial, “knew their bidding limit and decided that enough was enough.”
$1.1 billion was a hefty chunk of change, they comment (“Geez, for that much, you could provide security for a summit,” they add tartly.)
Meanwhile, back at Torstar Headquarters at One Yonge Street in Toronto, revenue was up. A year ago, the company lost $22 million in the first quarter. This year they made $7.4 million. The strong loonie cuts into that profit, but it’s still a considerable improvement.
And net debt was down more than $22 million from the previous quarter. “We’re rooting for that trend!” these investors add emphatically.
Torstar is in a tough industry, they admit, one in which it’s not easy to stay on top. Under those circumstances, “the dividend is delightful.” In fact, the $0.37 dividend yields a tidy 3.9 per cent while the shares trade at $9.40, about $2.35 off their April high.
And Torstar does own Harlequin Books, which guarantees a happy ending, doesn’t it? The Contra Guys remain buyers.
Zombieland
“Liquidation World (TSX-LQW) may be turning the corner,” announce the contrarians. And a big turn had to be made.
“After management looked like complete dolts by not checking in with the bank before closing the $2 million financing in March (an expensive deal with some key shareholders), the $1.5 million via a private placement in June seems far more credible.”
The shares will be diluted, but these investors can live with that.
They also like the evolving look of the distress retailer’s stores. One of the two visited a mall in London housing an older store that was “reminiscent of the movie Zombieland — in terms of store and customers.”
But a refurbished location in Mississauga “was hopping and had a pleasing layout.”
The company is still in the red. It lost $2.9 million in its most recent quarter. That’s better than $7.9 million the year before, but the bleeding must stop at some point.
“It is timidly being moved back to a buy,” say the Contra Guys, “but it does remain very risky.” The upside is appreciable, they add, even with the target price reduced from $8.24 to $5.24. Right now, it is both a turnaround stock and a penny stock at $0.96. There is no dividend.
In short, a stock only a contrarian could love.
To the Rio Grande
The same cannot be said of RioCan REIT (TSX-REI.UN), which has a good deal of support among conservative analysts and investors. It is Canada’s biggest REIT.
The big shopping centre owner has had its ups and downs of late, however. Still, its price chart doesn’t look as jagged as that of many other investments. The problem has been money.
RioCan took a lot of heat for maintaining its distribution through the downturn, say the Contra Guys. Good for investors, no doubt, but not good enough for Standard & Poor’s. The agency revised its rating to negative for insufficient coverage of the distribution.
It may have been touch and go in 2009, but recent results indicate that the cash-flow corner has been turned.
And RioCan’s CEO, Mr. Ed Sonshine, isn’t one to sit still while there’s new shopping centre acreage to be found.
“If the ‘can’ in RioCan stands for Canada,” ask the Guys, “will ‘Rio’ soon refer to Rio Grande?” The company is beefing up its U.S. holdings. It started with Cedar Shopping Centres, which owns 124 properties in the northeast.
Now the Lone Star State is on Mr. Sonshine’s target list. In May, the company signed a deal to acquire an 80 per cent interest in eight shopping centres in Austin, Dallas-Fort Worth and Houston.
There are many more opportunities in the U.S. than in Canada, where new development is harder to come by. Down south, RioCan is buying up high quality properties with low vacancy rates and shrewdly staying away from the most distressed markets — Arizona, California and Florida.
The company’s improved profitability will be tied to its ability to tap into today’s low interest rates. That means writing mortages for about 5 per cent while retiring higher interest debt.
To get this process in motion, RioCan negotiated a $300 million creidtr line. Says Mr. Sonshine, “We’ll earn effectively 7 per cent on that money simply with repayment of debt.”
Say the Contra Guys, “Gotta love the jingle of that tune!”
RioCan trades at $19.68, about forty cents off its 52-week high. The yield on the $1.38 distribution is a robust 7 per cent.
When the markets get squirrely, almost any investor may feel like a contrarian at times. But you’re only a true contrarian when you can look at a stock that’s sinking fast and see your ship coming in.
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