Top Ideas from a Contrarian-Value Expert

09/19/2019 5:00 am EST

Focus: STRATEGIES

Benj Gallander

President, Contra the Heard

When I speak on September 21st at the Toronto MoneyShow, my contrarian/value bent will be on full display. This way of looking at the world has been what has helped our model portfolio achieve a 21.3% annualized return over the past 10 years, observes Benj Gallander, editor of Contra the Heard Investment Letter.

For those of you attending the show, three members of our team will be at our booth to yak some and then some more about stocks, our methodology and where the investing world could be going from here given these crazy times. Meanwhile, as a teaser here are a couple of our favorite stocks.

Since the beginning of the recession, we have made a lot of dinero on American banks, ranging in size from Bank of America (BAC) to Fidelity Southern. One that has not moved much since our purchase price of $8.32 is First US. Bancshares (FUSB).

This small Alabama based operator has recovered after taking a big hit in the recession. What has not turned around is the divided, currently paying two pennies a quarter. Back in the day it was $0.27 a quarter. We expect it to be pushed back upwards, which should increase the stock price.

FUSB’s revenues are increasing, the bank is once again profitable, and the capitalization ratios are excellent. There are only about 7 million shares outstanding as this outfit did not dilute like many banks during the difficult times.

It trades well below the book value of $13.29 which is one reason that it could be a takeover candidate. Our initial sell target is $23.44, far below the $35+ where the stock price traded in the past.

On the Canadian side of the ledger, one of our favorites is Quarterhill (Toronto: QTRH). The former WiLan has expanded into the internet of things from its previous existence as a patent troll. To achieve this, there have been two major takeovers of IRD and Viziya. Part of the goal here is to make revenues less lumpy by creating more recurring sales.

In the most recent quarter, revenues jumped to $42.3 million from $20.4 million one year ago. The bottom line though was red based on a $10.6 million charge due to an earn-out on the Viziya acquisition.

While in the short-term the loss of $4.5 million looks ugly, without the one-time charge the profit would have been $6.1 million. It also indicates that the takeover was a good one. Meanwhile, cash swelled from $67.3 million to $88 million.

In CEO Douglas Parker's previous position as VP at OpenText, he led them to over $2 billion in acquisitions. In my phone calls with him, he stressed his prudence in doing takeovers. There is no rush here to be sure as the cash is not burning a hole in his pockets.

A key wild card for QTRH is a lawsuit with Apple (AAPL) that should be decided in 2020, if an agreement is not reached before. Quarterhill is guaranteed a win here of a minimum of $10 million. Ultimately it could be as high as $140 million. Wouldn’t that be sweet!

Our initial sell target is $4.84, less than half of where the stock previously traded. Insiders have been acquiring shares, evidently hoping to cash in later. Meanwhile, we’re collecting the dividend that is better than 2.5 percent.

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