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A View From Here November 2009

November 15, 2009 • Print This Article

What a tragedy November would be if there were no knowledge of Spring

If you look back at the valuation of our holdings last year and the shell shocked manner in which things were unfolding at the time it would have been difficult to anticipate that spring and summer would once again come, and the markets would resume some semblance of what we might term as normal...what is normal anyways? But just like the way our Canadian seasonal patterns change, difficult periods give way to better times. It has been that way in many instances during my 22 years and the fortitude to remain calm during that period has given way to resumption as we hopefully reach new peaks in due course. While, it is impossible to make this outright prediction, history suggests that we should.

The New Abnormal

It appears that a rebounding global economy is recovering from its deep recession. Some might say this has occurred because enough monetary and fiscal stimulus has been force-fed into the system to bring the dead back to life. But the fact remains that there is nothing remotely "normal" about the situation that the US and other major economies find themselves in. The post-Lehman collapse in growth has been extraordinary in breadth and magnitude, as was the accompanying destruction in asset values. Appropriately, this triggered an unprecedented policy response as interest rates have remained at almost zero. The full post-mortem on the causes of the economic and financial meltdown may not be completed for a long time, but the fingers of blame already at several areas including; Massive Global Financial Balances associated with the flood of cheap capital from Asia into Western nations (particularly the US); Misaligned incentives for lenders which fueled the credit-driven housing boom; Failure by regulators to monitor and act to the growing risks being taken by financial institutions; Complacency on the part of central bankers and human nature and the madness of crowds to get 'in' on the action. While this may be old news, the effects of this economic stress will linger for some time.

The important reality to consider is that despite this shocks or what is now commonly referred to as Black Swans, life goes on and people require goods and services, which keep the economy functioning.

Earnings Results Continue to Support Valuations

While 2008 ushered in terrible financial strains on the system, particularly in the US, earnings results have been better than expected. Of course, as the shock of 2008 took hold, economic activity came to a grinding halt, causing companies to reconsider their expenses. Many made dramatic moves such as the shedding of employees and as a result began to report better than expected earnings results. The rebound in the stock market we have seen thus far could have included the fruits of these aggressive cost cutting measures, which have shown up in improved profit margins on less revenue. Many companies are using this environment to raise equity and improve balance sheets, which should bode well for them going forward.

Our Holdings Continue to Perform Well

The earnings results from our holdings have been supporting share price advances that we have seen. Those of us who had the fortitude to add to positions in the late fall and winter months of 2009 have seen the best results, but those who have held steady in their positions have seen drastic improvement in their month end statements. The hard part is finding new investments.

In the past month since the last time we have written this note, we have seen earnings from a number of our holdings, which include, Methanex, FirstService, The Cash Store and Softchoice.

The Cash Store reported 1st quarter earnings of $0.33 per share compared to $0.31 last year and a 54% increase in the quarterly dividend which is now $0.40 annually. Last quarter the company paid an extra-ordinary $0.07 dividend as well. The company had spent a great deal of 2008 buying back shares and it is important to note that net income was actually lower than last year. However, the company has been actively expanding their outlets from 391 to 460 as well as opening stores in the UK and Australia. This has given way to increased expenses, which affect net income. Having said that, the company remains debt- free and continues to have over $1.00 per share of cash per share. The issue we must address is that the shares have had a tremendous increase over the past 5 months and now trade closer to what I consider a peak valuation for this industry. We will continue to monitor the situation closely.

Methanex, reported a small 3rd quarter loss. The Vancouver- based company is engaged in the worldwide production and marketing of methanol. Methanol, made from natural gas, is a basic chemical building block used to manufacture products such as formaldehyde, MTBE, acetic acid and others and has had an annual average earnings growth of 23.9% over the past 5 years. The strength of demand has led to a recovery in Methanol prices into the fourth quarter, which should allow for increased earnings results going forward.

FirstService was busy in the last month announcing earnings improvement as well as a 5-year US $75 million convertible bond offering and the acquisition of Colliers UK. The fruits of these moves should reward investors in due course as the company has a history of significant growth and trading at the low end of the its historical valuation and also has a significantly strong financial footing. If history is any guide, the potential for the next 2-5 year period for this company could be unprecedented.

SoftChoice released earnings in-line with expectations as margins are at their highest levels since we have owned the company. This is an investment that we feel a certain passion for as the company had virtually doubled its size through 3 acquisitions made between October 2007 and January 2008. These acquisitions took the balance of 2008 to integrate successfully, were financed with debt that had the misfortune of coming due during November and December 2008 amid a worldwide financial crisis. The good news is that they were successful in doing so without increasing the amount of shares in which profits from this recovery will be distributed over. Further, they have reduced net debt to a staggering low level of $2.8 million from $106 million a year ago. The potential for a significant earnings recovery in this company could bode well for us over the next couple of years with special attention being paid to the upcoming 4th quarter and particularly the 2nd quarter of 2010.

We hope the balance of November finds us healthy and happy.

All Good Things!


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.

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