Interview with Benj Gallander from Contra the Heard

CMS: For those who may not know, can you give us an overview of your investment philosophy?

Benj:  I am a contrarian investor, buying into companies that have been around for at least 10 years and where the stock price has been badly beaten down. My search is for deep value, while attempting to make sure that company fundamentals and management are sound. It is important to avoid value traps.

CMS:  How long have you been running Contra and what kind of returns have you realized?

BENJ:  It is hard to imagine but we are now in our 20^th year. The portfolio that I manage has had a five-year annualized return of 33.5 percent. The 15-year annualized return is 18 percent. 2013 was 49.4 percent.

CMS:  You mention that you target companies that have expected returns of 50% or more.  How do you determine which stocks have that sort of return potential?

BENJ:  That is based on the historical prices of the stocks. If the companies have not traded at those much higher levels for the majority of the past 10 years, or have not had recurring spikes above the 100 percent level, then they are not of interest. The likelihood of an enterprise that has already traded well above the valuation when purchased, retracing its footsteps is far greater than an outfit that has never been there.

CMS:  What has been your favourite and or most successful trade?

BENJ:  There have been lots. A 10-bagger on Bank of Ireland in less than seven months was the best. Maybe Lucky the Leprechaun was on my side.

CMS:  What has been your least successful trade and what lesson did you learn?

BENJ:  Unfortunately there have been a number of those too in my 35+ years of investing. As I write this, I can view my share certificate of Northland Bank. I not only bought that one but averaged down on it a number of times, increasing my loss when it went bankrupt in 1985. Between that and some other failures, I will no longer average down more than once on a stock. And after the initial purchase, I will wait a minimum of six months before adding to the original position. Worth noting too is that I invested too much of my money in Northland, which leads to the importance of diversification, while avoiding over diversification. Hmm, seems I learn more from losers than winners eh.

CMS:  When is it time for you to sell stocks that have performed well for you?

BENJ:  The time is ripe when the fundamentals of a corporation have deteriorated. Another reason to sometimes sell a loser, even if I still believe in it, is to take a tax loss to write off against gains. That can be prudent tax planning. And after 30 days, I have the option of repurchasing the position as the loss would have crystallized. Too many people fall in love with their positions, be they winners or losers. It is worth remembering that stocks are tools to make money. They do not love you so there is no reason to love them.

CMS:  How many years are you willing to hold a stock in order for your thesis to be played out?

BENJ:  I have no time limit. The average hold is about 3.5 years, which for many investors in this fast paced technological world would feel like a googolplex of lifetimes. But take an example like Stewart Enterprises. It was acquired in 2003 at $3.11 and sold in 2013 at $13.11. Gains like that are worth waiting for. Perhaps one could remould Lou Reed’s lyric, “Between thought and expression lies a lifetime.” “Between Benj’s buy and sell feels like a lifetime.” You even get a bit of alliteration – what could be finer?  When bought, I always set an initial sell target. This is exceedingly important to my system as I am clearest about a reasonable sale price when the stock is bought. At this point, I do not get caught up in the excitement and greed of it going higher and higher!!! Some of the original position is virtually always sold when the target has been reached. Normally at least 50 percent is sold with the entire investment often sent out the door.

CMS:  Given the nature of contrarian investing, how do you decide when an opportunity is a good contrarian investment versus a stock that is simply broken and unlikely to recover?

BENJ:  Great question and very significant. The balance sheet of the corporation is of crucial importance along with the financial ratios. Delving deep into the numbers offers an excellent indicator of what the future might hold. Also, if a sector is out of favour but remains a necessity, cherry picking the best one to three in that realm normally offers a superb chance of success. The previous achievements of management or lack of them is also crucial.

CMS:  What are the three most important metrics to you when looking at potential investments?

BENJ:  Don’t know that these are the three most important but all are essential.

1)   Risk relative to reward is critical.

2) If debt is high or increasing, that is often a huge AVOID THIS COMPANY sticker.

3) As mentioned previously, the financial ratios and financial statements are exceedingly important.

CMS:  Are there any industries you tend to gravitate toward, if so why?

BENJ:  Not really. At certain points in time, some industries are far more worthy as investments than others. For example, after 2008 I went heavily into American financials, believing that this sector was not going to disintegrate. At different points in time, steel, technology and commodities have also been excellent pickings. No question, there are cycles that exist and using those wisely improves returns.

CMS:  What industries/sectors look particularly interesting to you right now? Any investments’ within those sectors you’re willing to mention?

BENJ:  Commodities is one arena that has been badly beaten and recently has recovered somewhat. In that realm I purchased Harmony Gold Mining (HMY-NYSE), a South African player. Contrarian indeed. European telecoms were also spanked and I bought into France Telecom, which has since changed its name to Orange (ORAN-NYSE). This enterprise’s financials were better than others in this field.

CMS:  What are some other stocks that look particularly interesting to you at this time?

BENJ:  A small GPS player on the TSX, Agjunction (AJX) appears to have the potential to triple. Norsat (NII-TSX), a satellite/communications player also seems to have significant upside. But worthwhile to note is that this one has been in the portfolio since 2007 and has thus far lost me money. Capstone Infrastructure (CSE-TSX) is an energy provider with a fat dividend that could do well indeed.

CMS:  Are there any stocks that you are seeing as great takeover candidates? Why?

BENJ:  Well one of the primary reasons that I purchased the aforementioned Capstone is that it   would not surprise me at all to see a larger player swallow it. The company has some good assets and there are limited expansion possibilities in this field if it is not done via takeover. Richmont Mines (RIC-TSX) could also be gulped by a bigger player with deeper pockets. Iteris (ITI-NYSE MKT), a transportation solutions provider was purchased with a takeover in mind. One of its primary competitors was consumed. With its beautiful balance sheet and profitable bottom line, this one could easily be gobbled up.

CMS:  All Canadians love to hear about Blackberry, where do you see this company in one year? Five years?

BENJ:  I never speculate on where companies’ stock prices will be at a particular point in the future. The vast majority of the “experts” who do that are normally proven wrong. That being said, it is held in both the President’s Portfolio that I manage and in the Vice-President’s Portfolio that Ben Stadelmann manages. We both believe that this outfit has significant upside, although the road will be anything but smooth. It is fascinating to watch as the sentiment on this one swings regularly from positive to negative and back again.

CMS:  What are three must-read books for investors in your opinion?

BENJ:  Well those who are interested in my methodology might want to read, The Contrarian Investor’s 13 How to Earn Superior Returns in the Stock Market. Penguin published this one of mine in both hard and soft covers and it became a best-seller, available from our website at www.contratheheard.com. A couple others include Graham and Dodd’s Security Analysis, albeit it is long and dense. On the lighter side, but of tremendous merit is an oldie but goodie, Where Are the Customers’ Yachts? by Fred Schwed. Lots of fun while also being meaningful

CMS:  What is the best piece of advice you would give to investors getting started out?

BENJ:  Patience. And read widely.

CMS:  Any final words of wisdom you would like to leave us with?

BENJ:  Life is short. Enjoy it as best you can. As the Dalai Lama said,

“Happiness is not something readymade. It comes from your own actions.”

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Canadian MoneySaver would like to thank Benj Gallander of Contra the Heard for an informative interview.