Benj Gallander: Top Picks Update

07/11/2014 10:00 am EST

Focus: STOCKS

Benj Gallander

President, Contra the Heard

Each January, we ask the nation’s top newsletter advisors for their favorite stocks for 2014. Now that we have reached mid-year, we are following up with some advisors whose performance was most noteworthy. Here, we talk with Benj Gallander, editor of Contra the Heard.

Steven Halpern:  Our guest today is value investor, Benj Gallander, Editor of the Contrarian Focus Newsletter, Contra the Heard.  How are you doing today, Benj?

Benj Gallander:  I am doing just fine, Steven.  How about yourself?

Steven Halpern:  Very good.  At the start of 2014, you chose Flextronics (FLEX) as your favorite stock for the new year.  Since then, the shares are up over 40%.  Could you give us some background on the company and your original rationale for recommending the stock?

Benj Gallander:  Absolutely.  Flextronics was founded in 1990 in Singapore, so it’s been around for, around, 25 years.  They design, manufacture, and supply chain services for OEMs (original equipment manufacturers) and they’re in a number of different fields, from computer to energy, to telecommunications, infrastructure, so my feeling was that the company had already recovered quite a bit in 2010. 

They went from red ink to black ink and have stayed black since then, and I felt that—if the economy recovered—the company would do that much better, which they seem to be doing. 

Often it takes a while for the market to recognize when a company is indeed recovering, and I think—finally—the market has recognized that, and there are a number of reasons for it; revenues are up, earnings are up, the company has a good balance sheet, cash flow from operations last quarter was $1.2 billion with free cash flow $701 million. 

One of the most interesting things is their share count has gone down from about 811 million in 2010 to 623 million at this point in time, so earnings are up but it looks like it’s even more because the earnings per share has gone up further.  One other thing, the company has talked about implementing a dividend. 

If they actually do that, that should bode well for the stock price and, as you may know, after a company implements a dividend usually for the next few years, the company does better than stock market averages on the whole.

Steven Halpern:  So, for investors who followed your original recommendation back at the start of the year, would you still suggest holding the shares and also for new investors, would you consider initiating all positions now?

Benj Gallander:  Well, you know, I don’t know what other people should do.  I can say that I continue to hold the shares.  I have an initial sell target of $18.74, which is about 60% above what it is now and I can see it going further than that, so I am very comfortable with this one and have zero desire to sell the position and will continue to hold.

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Steven Halpern:  So, looking out for the balance of the year, perhaps you would highlight on another stock or two that Contrarian investors might want to take a look at now.

Benj Gallander:  Well, it’s always difficult in the short-term, so we’re looking at about six months and I never know what will happen with stocks in the short-term. 

Statistically, forecasters, analysts who look a year ahead on stocks, they’re only right about 24% of the time, so that’s one out of four, not very good, but two companies that I like is—you may know I bought in a lot of financials since 2008. 

Two that I like are at opposite ends of the spectrum.  One is Bank of America (BAC) for which I paid $6.76 a couple years ago.  I have a target price on that one of $38.74.  I think that Brian Moynahan is doing a fantastic turnaround there. 

The major problem is litigation.  They get hit with one lawsuit after another but I think they’re getting closer to the end of the tunnel. 

The other thing is, we know that he wants to increase the dividend.  The amount is going up to five cents a quarter.  Unfortunately, because of some account problems, that didn’t happen but I expect that to happen before the end of 2016, so I think there is tremendous upside on that one.  That’s one of the biggest banks in the world. 

A smaller one is Bank of Commerce Holdings (BOCH) out of California and it’s a very, very small bank but every year during the recession, they managed to make money.  They have been buying back shares.

They had to increase them with the financial difficulties.  Went from eight million to almost 17 million.  They backed about 15 million shares.  They pay a dividend of three cents a quarter, but at the end of last year, they paid five cents a quarter, a bonus of two cents, so that’s a lovely little payout while we sit and wait for further upside. 

My target price on that one is $11.49, so two banks and, I think, the financial sector has moved a lot.  One thing worth noting is as interest rates go up, which they will, bank margins normally increase and that, I think, will help both of these banks and others in the sector.

Steven Halpern:  Well, we really appreciate you taking the time today.  Thanks for joining us.

Benj Gallander:  It’s a pleasure, Steve.

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