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A View From Here January 2012

January 27, 2012 • Print This Article

When you're trying to soar with the eagles, you don't poop like a canary - Ace Greenberg

A Frustrating Year Ends

In the business of financial advisory, January is a time to assess the previous tenure and what we hope for the upcoming 12 months. It goes without saying that for all investors, 2011 was a frustrating year. The US markets essentially went nowhere, but did so violently and many felt like we were awaiting the end of the world. Canadian investors faired worse as natural resources and base metal share prices plummeted, recovered and then plummeted again and previous market darlings such as Research in Motion and Sino Forest proved that there were few places to hide. It has been our view that despite an 11.9% loss in the TSX, most investors faired much worse. We noted however, that after reaching all-time highs for our portfolios in April, we witnessed an 8- month consolidation that began to turn around in November. But mid December saw some difficulty in two investment positions that added further frustration on our results. The good news however, is that January has been so strong, that it has erased almost all of 2011 in one month.

Performance and the Tale of Two Investments

Our performance in 2011 still exceeded the losses made by the TSX and would have been much better if it were not for the sudden pullback of two of our positions. Firstly, our investment in Skope Energy, suffered a major setback with their bankers despite strong cash flow, dividends and steady results in the year we owned it. Our holding in Easyhome was subject to late year uncertainty from a change in the composition of its board of directors following significant insider purchases which is now 49% of the company. While the latter has resolved itself through stronger share ownership representation in its board of directors, Skope will likely never recover to our purchase price. With so many lessons learned from our previous years of investing, I still marvel how new problems reveal themselves that were difficult to see coming. While it can be viewed as cold comfort, these positions represented a smaller component of our investment portfolios and while large enough to have an adverse effect on 2011's performance, they were not enough to damage the growth we have been able to achieve over the long term. We continue to be advocates in the purchase of Easyhome and have used the malaise to add to existing positions.

Purchase in Small Increments

Our experience now enters its 24th year; we have stated for most of that period that all new investments be purchased in relatively small increments. The concept behind this process is that as the business begins to gain traction, further commitments are added as our conviction grows. In both the mentioned positions, we owned an initial investment and have used the perceived adversity to add to our investment in Easyhome. This has already paid dividends as we continue to feel strongly about this business. However, by purchasing a small stake at the outset of an investment makes possibility of adversity more fathomable. We are value investors and from time to time, positions simply do not work out for different reasons and we do our best to take actions rather than sit and hope that something will correct itself. We must be prepared to accept this reality.

However, when we look at the sum of its parts, our investment portfolios have traditionally achieved returns that few have been able to accomplish. This is something we remain quite proud of and believe can continue.

Fantastic Start to 2012!

With that being said, January has produced returns that have almost eradicated all of the consolidation of 2011. With dramatic increases in the price of almost all of our investment positions, and better than expected earnings from Methanex, we have seen tremendous almost double-digit returns in just the first three weeks of 2012. A special mention goes out to one of our most passionate investments, Softchoice. The company announced that the Ontario Teachers pension fund has sold its entire 26% stake to a number of different investment funds. Collectively, we are significant shareholders in this company and believe that the rise in its fortunes has just begun. In December, the company made its first acquisition since 2008 which should contribute to earnings this year. Further, the company still has enough cash (and no debt) to possibly fund a dividend policy, which is something we have discussed strongly with senior management of the company.

Here is hoping that we have a lot more of January's success for the balance of the year, because as we hopefully believe you know, we are all shareholders in the same investments.

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.

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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