Contrarian Calls from a "Market Master"
05/06/2016 10:00 am EST
Benj Gallander, editor of Contra the Heard, follows a contrarian-style investment approach; his model portfolio has shown an annualized return of 21.6% for 15 years. Here, he explains his strategy and highlights some favorite portfolio holdings.
Steve Halpern: Our guest today is Benj Gallander, editor of Contra the Heard, with one of the top-performing portfolios in the financial newsletter industry. How are you doing today, Benj?
Benj Gallander: I’m doing very well, Steven. How about yourself?
Steve Halpern: Very good. First, congratulations are in order. A new bestseller, Market Masters, features interviews with 26 industry-leading investment experts, and you’re included there. That must be a pretty exciting development.
Benj Gallander: It is. It really strokes the ego, if I may say, and not only am I included, I’m the first one in the book, and I guess what attracted the author, Robin Speziale, is our annualized return for 15 years of 21.6%, and we’re very proud of it. I wish we could do that every year.
Steve Halpern: Now, that return has come as a result of a contrarian style of investing, and I know at The Las Vegas MoneyShow next week, you’ll be discussing that strategy in detail, but perhaps you could give our listeners a quick overview of this investment strategy.
Benj Gallander: Oh, absolutely, and I’m looking forward to coming to The MoneyShow. I’ve spoken to a show in Orlando and in Toronto, but never in Vegas. It’s a great opportunity. They put on wonderful shows.
We are contrarians. We look at turnarounds all the time, companies that are out of favor, but we’re very much value investors.
I only buy into companies that have been around for at least 10 years, so they have a track record that I feel have a minimum of 100% upside, often 300% or 400%, and we look very closely at financial statements, the management.
I focus a lot on financial ratios. I try and avoid companies that have a tremendous amount of debt, because that increases risk quite a lot, and a key factor in the 22 years we’ve been doing investment letters we’ve had take over virtually every year in the portfolio that only has 15 to 25 stocks, and that has really boosted returns handily.
Steve Halpern: So you do a very in-depth analysis on a limited numbers of stocks, so I assume you get so familiar with the company that you’re willing to hold it for many years, if necessary.
Benj Gallander: We are, and given that we’re looking at 100% plus gains, one has to assume that they’ll hold stocks for a number of years.
I think their average hold time is about three and a half years, but we held stocks like Service Corp. and Stewart for over 10 years, but the gains were 300% to 400% plus on those companies. In addition, we receive dividends, and of course, that helps to fatten the returns at the same time.
Steve Halpern: Now let’s look at a couple of stocks to help our listeners better understand your approach. One long-term idea that you’ve been recommending is Flextronics International (FLEX). What’s the attraction here?
Benj Gallander: Well, this is a very well established company. Like many in the field, they had difficulties during the recession. They have sales of about $25 billion and a debt load less than $3 billion.
Management has certainly moved in the time, and because they had difficulties during the recession, they really had to do a makeover of the company to some degree, and they’ve done that well.
The bottom line has been fat cash flow, excellent, and over the past number of years, they have bought back over 20% of their shares, so that certainly helps the earnings per share at the end of the day.
Steve Halpern: Can you give a little background on what the company does?
Benj Gallander: Yes. They work in the OEM field. They help companies in many, many spheres, from computers to transportation to airlines, so they’re extremely well diversified, and they certainly, though, one has to think, move with the economy to some degree.
Fortunately, the US economy is in recovery mode. It also is geographically diversified, so that helps the bottom line, too.
Steve Halpern: Now, you very often follow companies that are off the radar screen of many advisors, and you’re a fan of a company called GSE Systems (GVP), which I would guess most people haven’t heard of. What’s the story here?
Benj Gallander: Well, this is a smaller company. Revenues chip in at about 55 million. New management came in last summer. They identified about $5 million to contain costs. It’s in the nuclear field, so they do training in that field and also in the petro chemical field.
A lot of people don’t realize that there’s almost 70 nuclear plants that are going to come online in the next number of years, and that’s helped them increase their backlog by about 60%.
Worth noting is they have cash in the bank. They have zero debt, which I like to see, and insiders own about 42%. I can see this company doubling from here. It’s been moving up nicely recently.
Steve Halpern: Now, finally, you’re bullish on two financial stocks, one, the well-known Bank of America (BAC), and also United Security Bancshares (USBI). Could you walk us through an overview of these financial picks and highlight what’s attractive about them?
Benj Gallander: Well, you know, we buy into sectors that are out of favor and after the financial crisis, banks in the states really were, so we bought Bank of America at six dollars and change. I’m in line with Warren Buffet on that one. It’s since gone up almost 150%. I think it could go up to mid-30s, where it used to trade.
You know, this is a key bank for the US and the world. They cut their dividend to a penny during the recession. They’ve since boosted it to a nickel.
I think it’ll go up to a dime or so in the next couple of years, and I think that now that litigation has gone way, way down, that’ll boost the bottom line, so for people who like a nice, big player, this is a good one.
USBI is a small player out of Alabama. It trades at eight dollars and change at about two-thirds of book value. Good capitalization ratios. They’ve been around a long time. They also pay a dividend of about two cents a quarter, as if two cents a quarter.
And one thing I like about dividend payers is — I say they allow me to be stupid longer — so if the stock doesn’t move, I get to collect the dividend.
They are owned about 8% by insiders, and the debt load is in good shape, too, so I think this one had could do a triple from this level.
Steve Halpern: Again, our guest is Benj Gallander, of Contra the Heard. Thank you so much for your time today.
Benj Gallander: Oh, it’s great to be here, and maybe I’ll see some of the listeners in Las Vegas next week.
By Benj Gallander, Editor of Contra the Heard