Gold bars are displayed at a bullion house in Mumbai.ARKO DATTA/Reuters
Ben Stadelmann and Benj Gallander, known as The Contra Guys and co-publishers of the Contra the Heard investment letter, focus on finding turnaround situations and stocks that are currently unpopular but are likely to regain their lustre. They are now regular contributors to Globe Unlimited's Inside the Market in addition to Globe Investor Gold.
It's that time of year when we like to review the companies that we opined on over the course of the past year and see how they are doing.
In December, 2013 the coal sector was in deep contrarian territory and Chinese miner Yanzhou Coal, then trading at $9.70 (U.S.), was being examined. The skid continued as cold weather in major Chinese cities drove pollution to extreme levels and the ADRs bottomed at $6.32. Curiously, as soon as spring winds blew away the smog, Yanzhou Coal rallied sharply to over $8.
This one has not been purchased for the portfolio yet, but remains on the Watch List. Currently at $8.21, it will be interesting to see if an attractive entry point again develops when the winter gloom intensifies. With a price-to-earnings ratio of 7.3 and a price to book ratio of .62, the valuation remains tempting.
Gold was basically flat in 2014 but many companies in the sector were down double digits. Harmony Gold, written about last February, was no exception and ended the year down 24 per cent. Despite the tumble it reported good third quarter numbers. In December, they released a pre-feasibility study for their JV Golpu project in Papua New Guinea. Though many risks remain with this project, the asset is world class and could be a boon to shareholders with a long time horizon. The stock price has popped since the New Year, up more than 50 per cent.
Last March, Benj took a gander at an American dividend play, Star Gas Partners. The distributer of heating oil and propane had a solid 2014 with annual revenue up 12.6 per cent to $2-billion. Net income of $36.1-million was 20 per cent higher. The dividend was bumped up to an annual rate of 35 cents per share giving this stock an attractive yield and the potential for further capital gains.
With Target leaving Canada it is fitting to review Reitmans, which Ben purchased for $5.51 (Canadian) last February. Although 2014 was harsh to many retailers, Reitmans posted solid numbers in the back half of the year proving its store closures and turnaround ideas were prudent. Not only did numbers improve but online sales soared.
The retail landscape in Canada is very competitive, Jacobs is gone, Mexx is closing and Le Chateau is barely hanging on. Reitmans has had huge problems of their own, their Smart Set division will be shuttered. As it restructures and improves its retail footprint, we believe Reitmans can survive and thrive, it remains one of the favourites in the VP portfolio. The stock finished the year solidly at $7.71.
Last May, the much maligned utility Atlantic Power was examined. The conclusion was that the corporation would probably survive but the danger level was too acute to buy the common shares. That made the stressed debentures a more comfortable choice.
Since then the common stock is down 8 per cent while the debentures are up slightly. The 6.25 coupon gives an effective yield of 6.9 per cent. Over the summer the company was up for sale but found no takers. In September, long-time CEO Barry Welch resigned and the dividend took a 70-per-cent haircut. Ouch! An activist investor is again agitating for a sale, but nothing has come of it yet. Selling the debentures at par as part of a break-up deal would be a very suitable end game from this corner.
Since June, First United has traded sideways. As we mentioned in an article last October, we often find stocks and sectors go sideways after an initial bounce away from the brink of bankruptcy and ruin. That appears to be the case with U.S. regional banks. With any luck this listless phase will be followed by a powerful move higher.
Also in June, Ben was wrestling with what to do with his position in Calgary-based telecom Axia NetMedia. Though the corporation had executed a significant turnaround, the stock price was stuck under $3 (Canadian) and making little progress to the target of $5.50. It was decided that the goal was overoptimistic and a new exit point at $3.25 was set. Although the revised target was hit in late December, it was deemed better to wait to sell until 2015 to defer capital gain taxes. Given the purchase price of $1.14 in 2011, waiting to year to pay makes a real difference!
As mentioned, small U.S. banks have been listless, but Cascade Bancorp has fallen about 20 per cent since it was written about in July. Benj added it to his collection on attractive metrics and strong insider buying. Insiders are still acquiring shares, valuations have improved, and the latest results look pretty good. He remains bullish on this one.
Finally, in August we wrote about Rona. Benj invested in the company's 5.25 per cent $25 par value preferred shares (RON.PR.A-T). He picked them up in the $18.71 to $19.67 range in 2013 and when the article was written they were trading at roughly $22. Both the common and preferred shares have eased back since then, but Benj is happy holding and reckons that in time the preferred shares will trade closer to par.
As for our overall portfolio results for 2014, the President's Portfolio continues to handily beat the indexes, up 23.9 per cent. The five-year annualized return is a sparkling 28.9 per cent. The Vice-President's Portfolio was up a more modest, but still respectable 14 per cent. Since its inception in 2010, it sports a total return of 80.1 per cent. Hopefully 2015 brings more of the same!