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A View From Here May 2013

May 2, 2013 • Print This Article

All of the previous inductee's into this pantheon of rock are like stars in the night's sky. Among them, we are one tiny point of light…shaped like a maple leaf! - Proud Canadian, Neil Peart - April 18, 2013 - drummer and lyricist of rock band Rush on their Induction into the Rock and Roll Hall of Fame

Teflon Market

Worldwide stock markets remain strong despite trepidation and an aging upward trend. The first quarter earnings releases underpinned the continued strength most companies generally met or exceeded expectations. More mercurial is the news from China that ranges from euphoria to despair depending on daily interpretation. In Canada, the persistent weakness in natural resources and metals continues to perplex investors who are stuck in its confines. We feel fortunate to have avoided what we view as a 'refugee' asset class.

And lastly, we say goodbye to Softchoice. We think of it as joining our own 'pantheon of previous stars', acquired by strategic or industry buyer's adding significant return to our accounts over the years.

It's All about Valuation

Many of our investment holdings continue to be revalued upwards, which has brought us both excitement and anxiety. We have 25 years of experience watching investments ebb and flow, but have not seen our returns as strong as we are currently witnessing. This performance is not lost on us, and we continuously remind clients of our good fortune. However, it remains our belief that valuing each holding relative to its historical average, peer group and within context of the general market fabric is paramount to successful investing.

This has prompted us to sell part of our holdings resulting in the highest cash position that we have had for some time. I'm reminded of a great quote; "A ship in a harbor is safe, but that is not what ships are built for." While we believe in this axiom, we need remind ourselves that one does not have to be fully invested at all times.

Good Bye Softchoice...

We were not surprised by news that Softchoice received a takeover offer, as it had always been an undervalued asset. Our initial investment dates back to late 2005 when management reviewed its corporate structure. The share price rose throughout 2007 as its largest peer was purchased at a significant premium, exposing a comparatively undervalued view of the company. By early 2008, management made 3 significant acquisitions, financed with short-term debt, which wasn't a problem at the time. By early spring, half of the position was closed out as the share price exceeded $20 on optimism we believed was reflected in the share price.

As the credit crisis took hold in the fall of 2008, investors grew concerned of maturing debt, driving down the value of its shares below $8. I'll never forget the sinking epiphany in a meeting with the CFO when asked how they planned to refinance under current circumstances (which they ultimately did by years end). However, the tidal wave of bad markets kept the share price depressed, changing hands well below $2. We met with management again in April 2009 confirming what we believed was a tremendous opportunity and as such, aggressively purchased more shares…for those who would listen!

As the crisis abated throughout the summer of 2009, the share price climbed to the $8/level where it stayed more or less for 3-years despite double-digit earnings growth. While we scratched our heads and looked under rocks trying to figure out what was missing, we continued to build our position. By late 2011, the share price rose above the $10 level as investors began to grasp onto its successful track record of growth and conservative balance sheet that not only had paid off all debt, but had grown to over $2/share. We still saw tremendous value and our collective position grew to almost 5% of the company's shares.

In early 2013, the increased share price began to reflect our anticipatory view and in March, we started to close out a percentage of our holdings to protect the large component it had grown to in our accounts. The April 22nd proposed takeover price provides the ultimate reason for us to close out the remainder of our shares…and perhaps the reason why the shares were mysteriously higher for a month prior to the offer.

I would like to thank senior management and the analysts who helped guide us through this remarkable 6-year journey…we were a thorn in their sides sometimes, but it was worth it.

There is no question that these are terrific times for our investments and know that you will enjoy opening your May statements when they arrive shortly.

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 épargnants.

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