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A View From Here: September

September 1, 2009 • Print This Article

Learn to value yourself, which means: to fight for your happiness - Ayn Rand

Back To The Future

Throughout the process of transferring our assets back to Research Capital, I was introduced to Atlas Shrugged, a novel written in 1957 by Ayn Rand. The book is a comment on the growth of bureaucracy, which results in all the creative minds leaving society. I really identified.

Suffice to say, that in an effort to create a more harmonious experience for all, the move to Research Capital was the right decision for us. I have been genuinely touched by the support of my peers, clients and family and thank you for your patience as of the process has taken way too long.

The good news is that the transfers have now been initiated and the accounts should be here over the next couple of weeks. The better news is that there has been a significant increase in our investment holdings throughout this period as earnings have surpassed expectations and the performance of our portfolios has exceeded the strong markets.

Further, shareholders recently approved the takeover of Pet Valu and by the time your holdings are transferred in, the proceeds from the $13.68 per share buyout should be in your account.

Speaking of Strong Markets

The rise in world stock markets since its low on March 6th, 2009 has been nothing short of stellar. If it weren't for the dramatic decline in the fall of 2008, we might be equally marveling at the stunning rise of the averages since the low. What this could be telling us is that a great deal of fear had been built into the prices of our investments. What wasn't built in is the possibility that human ingenuity may solve this issue, as we have for thousands of years. In Chris Anderson's new book entitled, Free, he points out that "people are inclined to believe the very worst about anything and everything and are immune to contrary evidence just as if they'd been medically vaccinated against the force of fact". The facts as I saw them were revealed in the relatively strong earnings and corporate developments that occurred with most of our investments over the preceding year, despite the weak markets, depressed share prices and fear of the next great depression. I find it interesting that every time we witness economic fear, there are direct correlations and comparisons made to that period in history. Surely, there is a better time in the thousands of years of economic development that allows us to draw on a better comparison. I am an ardent believer in human ingenuity and our ability to make a better tomorrow.

Perhaps one day we will look back to 2008 as something similar to the crash of 1987 where the repercussions were similar; an isolated event that almost crashed the worlds financial system, but didn't. We don't know, and nobody ever will until enough time has passed to make a better assessment.

Our Investment Holdings Have Exceeded The Markets

As strong the stock market has been since March, our holdings have actually performed much better. The main reason for this occurrence is that the companies had been delivering excellent results throughout the market malaise and the optimism we have witnessed between the spring and summer months has forced valuations to a much more realistic levels. As I write this, we have seen better than expected results from Mosaid, The Cash Store, Softchoice, Methanex and FirstService. Each one of these positions has increased more than 50% since the March lows and I still believe that they are worthy of our continued commitment. The hard part is finding new ones.

Pet Valu - Saying Goodbye to an excellent investment

Our investment in Pet Valu has been a hard fought battle. Interest in this company was initiated in 2005 following the resolution of a shareholder dispute that left the management team with over 30% of the company. I have always been an advocate of making investments where the management team holds a large position, as it begs to reason that their interests are aligned with ours. Pet Valu's enterprise value (amount of shares outstanding multiplied by the share price and then subtracting debt) at the time was a mere $10 million and in July 2009, a US private equity firm offered $143 million for the company. While this ending is somewhat disappointing in terms of purchase price, it is still a very profitable exit.

During the tenure of the past 4 years, so much work went into monitoring its progress. This included many attempts to meet and speak to senior management which went unabated until 2006 to confirm what I believed to be an extremely undervalued company. Our research revealed that compared with other publicly traded pet distributors and retailers, the company maintained higher profit margins due to the private label nature of its products. In an effort to continue this process, we spent a lot of time meeting with analysts and industry professionals to gather as much information to confirm the strength of our conviction, not to mention the resolve it took to stay with the investment as the worlds stock markets fell dramatically. Ultimately, we built a significant position in the company and our votes were instrumental in changing the Board of Directors in May of 2008 to better reflect our interests as shareholders. This led directly to the takeover of the company as a special committee of the new Board was set up to review the potential for creating shareholder value.

Thank You!

Of last note, I would like to thank you for the continued loyalty and hope that the resumption in the growth of our holdings yields results that few, if any have ever been able to achieve. Moreover, I want to comment on how welcoming my team has been at Research Capital.

Time to move forward... Back to the Future!

All Good Things,

Adam Hennick
Mackie Research Capital Corporation
416 860-6848

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des ├ępargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.


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