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A View From Here: October

October 29, 2009 • Print This Article

"Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves." - Peter Lynch

October, The Stock Market and the Great Myth

Ask most people about the stock market, and I am sure an overwhelming amount would agree that October is the worst performing month of the year. The reasons are simple - "Black Monday", or historically bad days in October, whether it's a 'crash' in 1987, 1989 or 1929 and October of 2008 did little to discredit this view. However, what might be interesting to note is that using historical data for North American index's reveals that September has traditionally been the worst month for investors. In fact, October has been decidedly one of the more boring months in terms of performance. The good news for us is that this year, September has been one of the strongest performance months that I had ever witnessed.

I do not believe there are seasonal patterns in the valuation of any business, so outside of anticipating a financial meltdown (which nobody that I know predicted or better yet profited from), adjusting our holdings to reflect the fear of what is largely a myth would make no sense at all.

What the Bookshelves

One of the best market indicators can be found by observing the new releases and best sellers. This is because selling books is a business geared at providing the public with investment themes that cover the predominant thoughts in business at that time. I like to refer to them as investment 'Themes'. Is there investment potential from what is selling? I believe there is, but perhaps only in what avoid.

Take for example, the best selling book in 1987 and most of 1988 according to The New York Times called ”The Great Depression of 1990” by Ravi Batra. If you had taken the advice of this publication you would have been very disappointed. Another example during that period was the dominance and efficiencies of Japanese companies in the late 1980's, and how books about rising stock markets were all the rage in 1999 and 2000, only give way to books about economic collapse following a significant equity market sell off in 2002.

So what are the books telling us today? The largest theme if surveyed any business book section will reveals that there is a lot of advice about why the financial collapse in 2008, the large debt problem in North America, the end of prosperity and of course how to fix it all. Maybe there were some of these books available prior to the financial crisis, but who would have wanted to read them when we were fixated on $200 Oil, a case for Base Metals and the theme that still exists today; the rising dominance of China.

Could A 'Theme' Be Priced In?

A critical viewpoint is that investment themes are read by many and ultimately valued into equity prices. Experience has told me that the best investments are ones that do not follow this path, as the risks can be much higher if they do not pan out. If you look at our most profitable investments, they have always been built upon this precedent. Nobody believed that there was a future for Pet Valu when we bought it because big-box stores would ultimately render it redundant.

Our Holdings Continue To Perform Well

Earnings reports were quiet in the month of September, but our positions have continued to perform extremely well, particularly FirstService, Mosaid and Softchoice Cp, which have made new 52-week highs.

Evertz Technologies released their 1st quarter earnings in September, which showed a very modest 6% increase in sales. The company's share price has been quietly underperforming all of our other holdings. Yet earnings can be viewed as a small victory considering that despite a 7% drop in US sales and a loss on currency due to the strength in the Canadian dollar, the company continued to execute extremely well by substantially increasing sales outside of North America.

While most analysts I have surveyed, have priced in little or no growth for the next year, I believe that the investment thesis remains firmly intact and would consider using this malaise to make additional purchases.

In the 2+ years we have held an investment position in it, the company has reported a steady stream of growth, while maintaining industry leading profit margins, having no debt, excess cash of over $1.40 per share, pays an attractive dividend and management holds just over 80% of the outstanding shares so our interests are well aligned with theirs. The company is in the business of providing high definition services to broadcast media be it by cable or Internet. At some point, if broadcasters (national and local) do not offer their production in HD, then they will lose their viewers. Penetration in its largest market (the US) is still under 30% and they are gaining market share worldwide suggesting that there is a lot of growth to capture in the coming years. With its conservative corporate structure and its compelling valuation, I continue to feel quite strongly about this investment.

Most accounts now hold an unusually high cash value due to the Pet Valu payment we received in early September and I continue to look to identify investment opportunities, but see no reason to rush into anything but there are a number of interesting candidates.

Hopefully, this performance can continue and increase the value of our holdings for the foreseeable future, but suffice to say, it is a situation that I welcome...especially after what we have seen from November 2007 through to March 2009.

All Good Things,

Adam Hennick
Senior Investment Advisor
Mackie Research Capital Corporation

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 épargnants.

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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