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Triple Play: Contrarian Values
05/12/2014 10:00 am EST
As the name of his newsletter suggests, Benj Gallander—editor of Contra the Heard—is a contrarian investor, taking a patient approach to finding unpopular stocks expected to return to favor. Here, he explains his strategy and highlights a trio of investment ideas.
Steven Halpern: Joining us today is Benj Gallandar, editor of Contra The Heard, a leading newsletter focused on contrarian investing. How are you doing today, Benj?
Benj Gallander: I am doing just fine, Steven, how about yourself?
Steven Halpern: Very good. Thank you for joining us. As a contrarian investor, you concentrate, often, on turnaround situations and stocks which are currently unpopular but ones that you believe are likely to return to favor. Could you tell us a little more about this overall investment approach?
Benj Gallander: Well, effectively, what we’re doing is looking at companies that have been beaten up. I don’t buy into any companies that have not been around for at least ten years, so they have a track record to boot.
What I can do is look at how successful the company has been in the past, and then, by looking at things like the financial ratios, the statements, talking to management, I try to discern whether or not they can actually return to form.
Being a contrarian is not something that is for everybody because psychologically it isn’t easy to do in many ways, because you’re buying into the unpopular. Certainly, often, when we buy into something, especially in the past, going back a number of years, we were often highly criticized, like, “why would you buy into that, it’s not doing well?”
I find that those are the companies that you can get the best returns on and I’m always looking at companies that have a minimum of 100% upside, often 200%, 300%, 400%, but my initial sell targets are always where the companies have traded in the past.
Steven Halpern: Now, that strategy has proven to be all very successful. Could you tell us a little about the performance record of Contra The Heard?
Benj Gallander: Well, the 15 year performance of the portfolio that I manage is 18% annualized return and, since the recession, the past five years, the annualized return has been 33.5%.
In 2010, we started a second portfolio under the management of my business partner Ben Stadelmann—I’ve known him for 35 years, since we were at the University of Western Ontario—and every year it’s been going, it has also beaten the stock market averages.
Steven Halpern: As part of your strategy, you talk about, what you call, the valuation cycle. Could you expand on that?
Benj Gallander: The valuation cycle is, basically, at certain points in time, stocks are undervalued, at other times, they’re overvalued. For example, five years ago our feeling was that they were undervalued, but again, at that point in time, it was a scary time to invest.
In 1999, we were writing about how the stock market—especially in terms of technology—didn’t make any sense because you had companies that had zero revenues and nominal revenues that were trading at tremendous overvaluation.
Over time, it’s like a pendulum swinging back and forth, and again, often it’s related to price earnings, which I certainly look at when I buy a company—but it is not all that important because, often, we’re buying into companies and their turnarounds.
Sometimes they’ve been losing money, sometimes they’re just making a nominal amount of money, so really, the earnings aren’t often that great. But we’ve had—in this recession—a fantastic opportunity because many companies that were well established—that had been around for 20, 30, 50 years—cut their dividends.|pagebreak|
And, because they cut their dividends, it gave us a chance to buy into companies where we felt the dividends would be increased or restored to previous values, so that’s not only a boost in the stock price but an instant return.
Steven Halpern: Now, I’ve noticed from following your newsletter for many years that, often, your recommendations become takeover targets. Is that a concerted effort from your strategy or simply a result of focusing on value situations?
Benj Gallander: I wouldn’t say, so much, it’s a concerted effort; certainly when there have been some rumors out there that a company may be taken over—because if there are those rumors—its usually got at a premium.
In the 20 years that I’ve been managing this portfolio, every year except onem there has been at least one takeover, sometimes five to six; now that’s in the portfolio. It’s only managed 15 to 25 stocks, so probability dictates these numbers are way out of whack.
We’re buying into companies that are beaten up and I find that other companies will not take them over as a general rule when they’re badly beaten up, but once they start to return to form, management starts to have the confidence that they can put in a takeover offer.
As a matter of fact, this year, in the Vice President’s portfolio that started with 21 stocks there have been three takeovers that have gone through and that certainly is a statistical anomaly but sometimes you get lucky that way and that’s because you made some good bets, so to speak.
Steven Halpern: Let’s look at some individual situations. One stock in your President’s Portfolio is Flextronics (FLEX). Incidentally, at the beginning of this year—in our annual top picks feature—you selected Flextronics as your top idea for 2014 and since then, the stock is up 21%. Can you tell us the story here and what your current outlook for the company is?
Benj Gallander: This is kind of a two-edged sword for us; number one, we’ve got Flextronics because they took over a company that we own called Solectron. We decided to keep it because we thought it was a good contrarian play; but we’ve had it since 2006 and it really has only gone up a little bit, which shows how patient we can be.
Our average hold time is about three and a half years. At this point in time, I have more confidence in the Flextronic portfolio, I think, than any time since we acquired it. Revenues have been going up quite handily; they’re north of $25 billion. The free cash flow is better than $700 million.
They’ve been buying back a lot of shares over the past year; they bought back 60 million shares, or 9% of the float. They make money. They’ve talked about implementing a dividend and if you look, statistically, once a company implements a dividend, the stock price tends to go up much more quickly than the stock market.|pagebreak|
Our initial sell target is about double where the price is now, and back a number of years, the stock price traded at better than $35. I have a lot of confidence in this position, but again, we don’t get them all, right, and sometimes they take time and this one certainly has taken quite a while before we really thought that it might finally boost up.
Steven Halpern: Out of favor doesn’t necessarily mean unknown; in fact, you own one stock in your portfolio, General Electric (GE), which is among the largest firms in the world. How did this kind of idea fit in with your strategy?
Benj Gallander: We’re often buying a lot of small-cap and some people used to say you’re always buying small-cap it seems, and we said no, that’s not the case. What happened during the recession was a lot of major corporations, blue chip corporations, came way, way down in price and General Electric was one.
We looked at this one and we saw it had very good management. Before we bought it, they had slashed the dividends so we thought this was a fair weather the economy and if the economy returned to form, General Electric should also do it.
It’s a perfect example of what I mentioned before—a company that had cut the dividend and we thought the company would increase the dividend and it has, I believe, four times since we bought it.
Often, when I’m publically speaking, sometimes, I’ll say dividends allow me to be stupid longer because if the stock price does not move I’m still getting some sort of return on my investment.
General Electric has gone up quite handily since we bought it. We still think it has a long way to run. If you look historically, it’s been way above the level it’s at now and our target price, and we always set an initial sell target price, is $35.24.
Steven Halpern: You’re also a specialist in Canadian stocks. Let’s look at one of those in your portfolio; it’s called RioCan (SCT:REI-UN) a Canadian REIT. Can you tell us about that?
Benj Gallander: Absolutely, it’s interesting in terms of how the portfolios evolve over time. I’ve got the highest concentration of American stocks in the portfolio that I’ve ever had, about 80%. The second portfolio that Ben manages is a lot more Canadian and RioCan is in there.
He bought this one at $19 and change and it’s a leader in the Canadian marketplace in terms of REITs, plus, during the recession, they bought into a number of American shopping malls and took over some companies. It was the perfect contrarian thing to do because they were buying at reduced rates.
RioCan, itself, they pay a distribution monthly of $11.75 so it’s a tremendous, tremendous payback right off the back every month for people who buy it. It has gone up quite a bit since we did purchase it from $19 and change as I said; it’s sitting around $27 now. We can see this one north of $30.
One of the things of being a contrarian a lot of people don’t recognize, at least, in our circumstance, is about half the stocks in both portfolios pay dividends and a lot of people think that contrarians are people buying turnarounds who don’t look into those situations but, as mentioned before, we certainly do enjoy them.
Steven Halpern: It was certainly a pleasure talking to you; thank you for taking the time today.
Benj Gallander: It’s a pleasure Steven, any time.