In January of this year, we featured our annual Top Picks report, highlighting the favorite stocks from the leading newsletter advisors. Today, we begin a series of interviews with 2015's top performers. Here, we talk with Benj Gallander, editor of Contra the Heard.
Steven Halpern: Joining us today is value investing expert, Benj Gallander, editor of Contra the Heard. How are you doing today, Benj?
Benj Gallander: I’m doing just fine today, sir, how about yourself, Steven.
Steven Halpern: Very good. Thank you so much for joining us. At MoneyShow now we’re preparing our 33rd annual Top Picks report in which we ask the nation’s top newsletter advisors for their favorite stocks for the new year. We’re also now reviewing the best performers from 2015, including your top pick from this year, GSE Systems (GVP), which rose 52%. Could you remind our listeners what the company does?
Benj Gallander: Yeah, this is a staffing company and they primarily work in the nuclear industry, oil and gas industry, chemical industry. They also do a lot of training. The company has been around since 1994, so they certainly have a very established track record.
Steven Halpern: So this seems a bit of a contrarian pick because the energy sector’s had such difficulty, yet this company has done incredibly well.
Benj Gallander: Yeah, well, it was definitely a contrarian pick. When they had the problems in Japan, the company took a real beating, as you know.
In Japan they stopped their nuclear program. In Germany they stopped it, although Japan has started up again. And we’ve seen this a lot over the years, besides here with Chernobyl.
Even in the US years ago when GPU—General Public Utilities—had their problems. That’s one of the things, of course, we focus on are industries that are out-of-favor, and companies out-of-favor, and ones we think will return to form in the future.
Steven Halpern: Now, in your review of the stock at the start of 2015, you were particularly optimistic about an acquisition they were making of a firm called Hyperspring, which you expected to be accretive to earnings this year. How has that worked out so far?
Benj Gallander: It’s worked out wonderfully. Often when one firm takes over another, there’s a tremendous amount of optimism, but then there’s a lot of write-offs, etc. In this case, GSE and Hyperspring had worked together for four years, so GSE knew what they were buying.
The sales have gone up about 91%, a lot of that’s based on Hyperspring, but at the same time, GSE revenues have gone up 26% on its own, so this huge revenue growth up to $15 million last quarter starts to make a lot more investors potentially interested in the company.
Steven Halpern: Also in your initial recommendation you pointed out that the firm had no debt and was trading near book value. Is the company still in a strong financial position?
Benj Gallander: It’s in a very strong financial position. They certainly used some money to take over Hyperspring, but they still have about $16 million in the bank and they have zero debt. That gives a margin of safety.
One of the things I like to do is to buy into companies with low or no debt and that means that the bank is not going to come-a-calling during the tough times, so, in this case, we have a beautiful balance sheet to look at when we watch the company.
Steven Halpern: Now despite the stock’s outperformance over the past 12 months, your sell target is $5.74 a share, which is more than double the current price. What do you expect in the coming year that can help the stock achieve that kind of outperformance again?
Benj Gallander: Well, this is a constant for us. I’m always looking at companies that have grown 100%, 200%, 300%, 400%, and based on history and the company returning to form.
I don’t buy anything new. All the companies have been around for at least ten years. I think here there’s a possibility for further revenue increases. The new CEO has found about $5 million worth of savings, so once you take into account that cost savings, the company lost a bit of money last quarter, but black ink should start to flow in the future.
Another interesting thing is insiders here own about 42% of the company and they continue to buy, so they obviously have a lot of faith. I think that the return of nuclear to a better position, China is adding a lot of nuclear plants, so that means that there’s going to be more business for GSE.
Steven Halpern: Now finally, could you tell our listeners a little about Contra the Heard and how GSE Systems is representative of your overall investment strategy.
Benj Gallander: Well, this is a company that traded I think way above our initial sale target of 5.74 for years; it actually touched $12 in the past ten years.
A couple examples of companies; when the American banking system got crushed we bought into Fidelity Southern (LION) and then sold after 450% gain plus dividends. A company better known is Bank of America (BAC), we bought at $6 and change.
GSE was the same model in terms of it isn’t badly beaten up. We thought the nuclear would come back to form, just as we thought the American banking system would come back to form at some point.
We’re always looking at value plays, contrarian plays, some that people have forgotten about or gotten scared about, but later on often they do this double, triple, quadruple in share price.
Steven Halpern: Just to remind our listeners, you’re very comfortable holding a stock for multiple years, correct?
Benj Gallander: Oh, no question. Our average hold time last time we looked at three and a half years. Some people think that’s too long, but again, if you’re looking at huge gains it makes sense.
Years ago we held Service Corp. (SCI) and Stewart Enterprises (STEI), the biggest companies in the funeral sectors for over ten years, but the gains were absolutely huge and we ended up with over 400% on one, close to that on the other.
Plus, we had dividends and we do love dividends. Those kind of gains, even if your holding for two, three, five, ten years, at the end of the day they turn out to be very, very enjoyable.
Steven Halpern: Again, our guest is Benj Gallander, editor of Contra the Heard. Congratulations on your success in 2015 and we look forward to your participation in the upcoming report for 2016. Thank you again.
Benj Gallander: Happy to do it. Thank you Steven.