Out-of-Favor Favorites from Canada

09/12/2016 10:00 am EST

Focus: STRATEGIES

Benj Gallander

President, Contra the Heard

Benj Gallander is well known for his contrarian strategy, seeking undervalued companies with the prospects of high returns over a multi-year period. Here, the editor of Contra the Heard four out-of-favor Canadian stocks poised for long-term turnarounds.

Steve Halpern:  Our special guest today is contrarian investing expert Benj Gallander, editor of Contra the Heard.  How are you doing today, Benj?

Benj Gallander:  I'm doing very fine, sir.  How are you doing?

Steve Halpern:  Very good.  Thanks for taking the time.  Now as the name of your newsletter implies, contra the heard, you tend to buy stocks that are out of favor or under-recognized by the general investment community.  Could you talk a little more about your investing strategy?

Benj Gallander:  Yes, we invest in companies that are out of favor that have been beaten up.  We typically buy companies that are under $10 in price and have been around for a minimum of ten years -- so nothing potentially new and exciting.

And a lot of times we can buy into very, very big names that are beaten up.  We particularly like when a whole sector is out of favor and we think that that sector will rebound.

Steve Halpern:  And you're not looking for quick losing stocks?  As I understand your whole approach is long-term in nature.

Benj Gallander:  Absolutely.  We're looking at returns on each investment of better than 100%.  Often 200%, 300%, plus.  Now none of that though is pie in the sky.  

The stocks have always traded above that level in the past often for a long period of time so to get that kind of return often takes a few years.  I believe our average hold time last that I check was about three and one-half years.

Steve Halpern:  Now your portfolio is typically split between both US and Canadian stocks.  Do these markets generally move together or are there specific factors that you need to consider when balancing a portfolio made up of both US and Canadian stocks?

Benj Gallander:  They do not necessarily move together.  A number of years ago the Canadian market was quite hot as was the Canadian economy to some degree.  The US economy was having a lot more difficulties than we're having in Canada so it's a bit of a balancing act.  

As a matter of fact, right now about 75% of the portfolio that I manage is in the States.  Ideally before the end of the year during tax loss season, I'll acquire some Canadian companies and rebalance to some degree.

But we have to find good values and I only have in the portfolio between 15 and 25 stocks -- so not looking to have an awful lot of companies, but instead to cherry pick those that I think can have tremendous returns.

Steve Halpern:  Now given that this upcoming weekend you'll be speaking at the Toronto MoneyShow, let's cover the Canadian markets.  Could you share your thoughts on the general economic outlook for the Canadian economy?

Benj Gallander:  Well, Canada has been badly hit.  Part of it is because of oil and gas prices.  There's the fire in Fort McMurray and Alberta so that really hurt us.  At the same time commodity prices went way down.  There has been some recovery to be sure, but when that happened it hurt us further.

The Canadian government, the Federal government has said it will put $36 billion into infrastructure.  I personally think they're over-reacting because we are growing to some degree, but not as quickly as they would like.

And all levels of government here have a tremendous amount of debt and the Canadian consumer has the highest level of debt in our history so that means there's not a lot of wiggle room for expansion based on governments or individuals spending money.

Steve Halpern:  Let's take the chance to go through a few of the Canadian stocks you like and one that's been out of favor in recent years is Blackberry (BBRY).  What do you like about this story now?

Benj Gallander:  Well, it used to be a darling, that's for sure and then they ran into hard times.  Just less than three years ago they brought John Chen in.  He did a tremendous turnaround of Sybase and then that company was sold at a lovely premium.  

I think that he's doing the same kind of thing here. I'm not saying that Blackberry will be sold, but I think he is working on the turnaround.  He is hitting his targets.  

It's taking longer than a lot of analysts and investors would like, but when you're looking at a huge technology firm, these things don't happen quickly.

But one thing worthy of noting is that when they do turn they often appear to turn fairly quickly and the stock price can jump quite handily.  I can see this one doubling over the next few years.

Steve Halpern:  Now you also see potential in a woman's apparel retailer called Reitmans Canada Ltd. (Toronto: RET.TO).  What's the situation here?

Benj Gallander:  Well, clothing stores have been way out of favor of the last few years.  We've seen many, many bankruptcies in the sector, both in the states and Canada as you know.  This company has got a long proud tradition.  

They've had their difficulties.  They're currently losing some money, but different than most retailers is that the company has zero debt.  It also pays a dividend of five cents every quarter so it's a nice payout and their same store sales have been going up.  

Now a lot of that is because of the Internet.  Year over year internet sales went up over 50%, but because the company has no debt that means it's difficult for them to get into real financial difficulties and I think we're going to see a major turnaround there in the next couple of years.

Steve Halpern:  Now in the gold sector you point to a company called Alacer Gold (Toronto: ASR) so what's the attraction here?

Benj Gallander:  Well, one reason investors might want to stay away is because the company is located in Turkey and for those who are wary of the political situation there they might just want to run in the other direction, but it's nice to have some gold in the portfolio.  

The company produces in an all and sustaining cost.  It's just over $900. They have $312 million US in the kitty.  They've just signed an agreement for a loan of about $350 million and that's to develop their deposit in Turkey further.  

The company is profitable now and as they bring this deposit online, I think that the stock price will go up.  We have a target price again of better than a double on this one.

Steve Halpern:  Now, finally, you point to a company called ATS Automation Tooling Systems (Toronto: ATA).  What does this company do?

Benj Gallander:  This is a big company in Canada.  Automation is the key. Even in the engineering field, oil and gas, chemical.  They literally just signed a deal in the medical field.  They do life sciences.  

It's a company with better than a billion dollars in revenues.  They have operations in a number of different countries.  

One thing investors might want to think about is the CEO Anthony Caputo has said that he's going to move on as of next February, but obviously this allows for a good succession plan in place.  

The company has traded well over $20 in the past; must higher actually.  It's sitting at around $10 right now so they have a good backlog, they're profitable and I think at some point the market will recognize this company going forward and the stock price will increase.

Steve Halpern:  Again, our guest is Benj Gallander of Contra the Heard and a featured speaker at the upcoming Toronto Money Show.  Thank you so much for your time today.

Benj Gallander:  Pleasure to be here, Steven.  Thank you very much for having me.
Editor's Note: Benj Gallander will be a featured speaker at the Toronto MoneyShow on September 17th, offer a working on increasing your investment returns as well as a special Q&A session. Register for free here.

By Benj Gallander, Editor of Contra the Heard

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