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We regularly use the filter on The Globe and Mail website to find stocks worth buying. Among the major corporations that our search has led us to purchase and that we currently own are Bank of America Corp., BlackBerry Ltd., Flex Ltd., Orange S.A. and RioCan Real Estate Investment Trust. But there are also numerous smallish enterprises that the filter unveiled. One that Benj bought was O2Micro International Ltd.

Founded in 1995, O2Micro designs, develops and markets power-management components for electronics manufacturers. Based in the Cayman Islands, the focus is on Asian sales, although there are nominal revenues outside of that continent. With less than 61,000 people, the Caymans cannot exactly sustain a company with ambition but will help those looking for tax breaks.

The enterprise has some beautiful numbers. While the stock trades at around US$2.30, book value kicks in at US$3.28 with no goodwill on the balance sheet. There is zero debt, which helps to negate risk. Insiders own about 6 per cent. There is about US$40-million in the kitty between cash and short-term investments. Revenues have been trending upward, cresting at US$60-million last year. So why is this stock so woebegone, having dropped from over US$20?

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Though improving, sales are still only half of what they were 10 years ago. Plus the bottom line for O2Micro has sucked for years, bleeding red ink every year since 2012. That is a long time.

So why did Benj buy? One of the advantages of following corporations for a long period of time when they are in the doldrums, is that often positive incremental change can be glimpsed, and future trends can be anticipated. While following O2Mictor, it always appeared to Benj that the company was having difficulty regaining its footing, but earlier this year it looked like the numbers were on firmer ground. For the quarter ended March 31, net income surprisingly was positive, at better than US$7-million. Last quarter was a far more modest US$1.5-million, but a back-to-back profit is noteworthy. Finally, the market had something to cheer about. As did Benj.

But there was one problem. When purchasing stocks for the President’s Portfolio at Contra and for himself, a one-to-four weighting system is used. One is a minimum bet, four represents four times as much money being invested; the analysis of a better risk-reward ratio would lead to more cash being placed on the table. In this case, O2Micro rated a one – a minimum buy. However, when O2Micro was purchased, the partial fill (only part of the trade could be fulfilled at the desired price) was about 6 per cent of the normal minimum buy. It was teeny tiny and though the bid was left dangling hoping for a further acquisition, that did not happen. What to do with this minuscule position?

Some investors in this circumstance would decide to sell the position quickly, deciding that the insignificant dollar value was not worth the toil. Benj elected to hold the stock and hope that at some point it would appreciate to the initial sell target of US$3.74 and quite possibly pass handily through that level. While the handsome upward move has been lovely to see since the purchase at US$1.35 in May, lots of upside potential remains.

Obtaining mini fills when one buys or sells a stock is a bit of a pain. Yet, rewards can still accrue to the patient investor. Though the proceeds might be slighter than originally anticipated, adding gains to the coffers irrespective of the size is beneficial. O2Micro offers some action, but not as much heavy breathing as anticipated.

Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter

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