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A View From Here December 2009

December 1, 2009 • Print This Article

"Pessimism is a luxury that no one can afford themselves" - Golda Meir

Can you really Prepare for the Apocalypse?

As stock markets around the world continue to move higher since the lows hit on March 10th more pundits have emerged and played on our fears. It is my belief that we do not have the luxury to be pessimistic and remain unaware of anyone whom it has served well. We have constructed investment portfolios around a sound valuation basis for each equity and fixed income position that you hold. While the stock markets have gone through tremendous turmoil during the past two years, simply sticking to our fundamental viewpoint for each investment has served us well. But don't say that to the pessimists, because even if you could prove it to them, they would tell you that the end is coming and the act has yet to play out. But this viewpoint is indeed a luxury we can't afford and the increase in the valuations as described below reminds me of another quote by John Lennon (who died 29 years ago this month); "Life is what happens to you while you're making other plans." How true. Can you really prepare for the apocalypse?

November 24, 2008

While searching through documents, I found an asset listing from last year containing the value of our accounts from the date listed above. Although it was painful to see, we are now in possession of two facts that have followed, the financial crisis was at the time, knee deep into our valuations; and by March, we would see our lowest asset values. The most interesting fact is what has happened to our accounts over the proceeding year as each account has increased well in excess of all major North American major stock indexes and perhaps anywhere else in the world for that matter. While each investment account is structured slightly different depending on individual needs, almost all investment portfolios hold the same equity positions and those who used the malaise to take advantage of the markets have seen the most significant increases. It might also be interesting to note that many long-term accounts are within 15% - 30% of their all time highs. If you would like to discuss the returns, please feel free to contact us.

History Suggests Market Upside Could Persist

As the theme of this month's commentary suggests, bewilderment exists because most experts cannot decide if the strength of the markets that began in March is a new bull or a suckers rally. As I have mentioned before, if it weren't for the incredible weakness we witnessed during 2007-2009, we would be marveling at the stunning rally we have seen since. But there are a lot of signposts that suggest that the rally might have some room yet to increase. Think about how fresh the financial crisis is in people's minds and the obstacles that optimism must overcome to increase valuations. An analyst once told me years ago that a recession is a time when the world begins to roll up its sleeves and get back to work to fix things. There are so many things in our way to challenge a viewpoint of change; big losses from commercial real estate loans' high credit card losses; economy will never recover, consumer debt will harbinger all future growth; huge government deficits, unemployment growth; over-valuation of equity prices. These are things I believe is valued into each and every business we own on some level.

But turning to history might suggest differently. According to our friend Ron Meisels of Phases & Cycles, using history of the initial phase of long-term up-trends for the S&P 500 index would suggest that the average rally should last approximately 10 - 14 months. He writes, "What remains confusing is that so many seem to expect the markets to falter, yet history shows that a 10-14 month rally after a bear market is common, minor corrections notwithstanding".

News Affecting Our Holdings

After commenting last month on Softchoice's ability to complete three acquisitions and eradicate almost all of its debt without the issuance of any new shares, the company announced that they raised just under $18 million by way of a bought-deal financing. Management indicated that they plan to strengthen the balance sheet and may look to make additional acquisitions in the future. The issuance of shares was priced at $7.75/share and put the company back into its strongest financial position in over 2 years. We can't fault management for taking this approach as the financial crisis created nothing short of panic that the company would not be able to refinance debt which came due in November and December of 2008...but they did at that time without diluting the shares. A stronger share price has afforded them the opportunity to err on the side of caution and strengthen their balance sheet. I do however suspect that this will keep the share price at bay for the foreseeable future, as we won't see earnings or anticipate any significant corporate updates until late February or early March. However, this does represent an opportunity to add to an investment that we feel a great deal of passion for. It's also noteworthy that the Teachers Pension Fund (the same one that owns the majority of the Toronto Maple Leafs) holds just under 30% of the company... at higher prices I might add.

On November 26th, Mosaid Technologies released excellent 2nd quarter earnings of $0.49/share (an increase of 48%) and raised its earnings guidance to $2.15-$2.22 for the year. Mosaid is one of the very few companies that still offer earnings guidance to investors. The Company owns over 1700 technology patents but earns the majority of their revenue from Semiconductor and Wi-Fi technologies which they license to manufacturers and earn royalties for their use. Mosaid pays an attractive dividend of $1.00 per share annually and has a war chest of over $5.50 per share of cash. There has been some speculation recently due to a large semiconductor license renewal expected on December 31st. This had put pressure on the share price over the past couple of months, but the signing of a Wi-Fi license with the same company on November 23rd has alleviated some of that fear coupled with strong earnings and a stable and increasing outlook from management. We remain optimistic in our view of this holding and look to other royalty companies in different industries as a view to a much higher valuation metric which could be achieved at some point in the future.

On December 8, Evertz Technologies reported lower earnings for their second quarter of $0.23 per share on a revenue decline of 20%. Earnings however, increased marginally over the previous quarter as foreign orders made up for disappointing North American numbers and now account for over 40% of revenue. While there isn't much to celebrate with this release, it wasn't entirely unexpected and as the share price has remained stoic during this period of strength in the markets. Evertz is a vertically integrated designer, manufacturer and marketer of equipment to the broadcast industry and is specifically focused on the area of high definition. Our investment thesis remains; either broadcasters present their product in HD, or they will lose their views and henceforth, advertising dollars. On a more personal note, I find it increasingly difficult to watch anything that is not presented in HD on my own television. Further, the company is extremely cheap on a valuation basis given their strong profit margins, balance sheet and attractive dividend. Moreover, one of their largest competitors (Grass Valley) has been struggling financially and Evertz has been making up for the lackluster US sales with foreign ones. The company has no debt and over $1.30 per share of cash and the management owns over 80% of the company so our interests are well aligned with theirs. A revaluation of its business could occur as the economy strengthens and/or broadcasters resume their commitment to the conversion of their product in High Definition. I don't believe that this will be too far off in the future and continue to use the weakness in its shares to add to existing positions. Their largest market is currently the United States where less than 30% is still offering their product in standard definition so there is a long way to go.

Nearing Tax-Loss Selling Season

December has always been an interesting month in the markets as investors begin to slowly go into vacation mode and tax-loss selling puts further pressure on underperforming equities. This year, there probably isn't that much tax loss selling as in previous ones, due to the strength in the stock market since March and the massive amount of selling which occurred last year. Either way, it tends to make for some wonky (for lack of better term) year-end trading. Tax loss selling dates are December 24th for Canadian and US bonds and equities.

Lastly...

We hope the holiday season finds you safe and happy as we exit one of the more peculiar years of my 21-year career on what we hope will be a high note. I am excited to say that throughout the year, the difficult decisions we made have had a tremendous benefit on our holdings and we are part of an elite group that see's returns that few if any, are able to achieve.

It goes to show that while we cannot be blind to the possibility of sudden changes which occur in the financial markets, an approach with prudence mixed with optimism has been the right course of action.

It is also the year where my favorite music release was by a movie star (Scarlett Johansson) and favorite film was a touching documentary about a Toronto Rock and Roll Band (Anvil, The Story of Anvil). If you want a copy of either, please contact and we are happy to forward one to you.

Viva Dysfunction and bring on the future!

All Good Things,

Adam Hennick

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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