One of the questions we at Contra the Heard often get is: "You guys are contrarians -- are you buying XYZ (insert name of pathetically beat-up stock)?"
Sometimes the query comes from a value hound, sniffing out potential bargains, sometimes a cheapskate thinking that anything whipped resembles value. More often, it is a hapless shareholder who bought a position at much, much higher prices, and is grasping at straws for a possible comeback.
We've been asked about Bombardier Inc. steadily since it lost half its value in 2001. That was too early for us to even think about it. Once it got down to $5, we put it on our Stock Watch List. At that point, it merited candidacy for the portfolio; the company had a long track record, it was in an out-of-favour industry, and its stock price was near 10-year lows.
The first part of the wait is de rigeur in our methodology, as we eschew the falling knife. That means some companies are missed that snap back quickly with a "v" type pattern. We feel more comfortable with a longer bottoming process, where the first steps in a corporate turnaround are established.
Bombardier's selection of Paul Tellier as president and chief executive officer in early 2003 was an encouraging sign, but the sharp rally in the stock price that greeted him was silly. In our view, investors were making two basic errors.
First, they were underestimating the size of the job, and were overly optimistic about how quickly a new CEO could effect change. It took Mr. Tellier almost a decade to revitalize Canadian National Railway Co.
Second, there was a palpable feeling that investors simply wanted the comeback to occur, and were using it as an opportunity to average down. A better entry point is found when people have given up, taken their lumps, and the predominant sentiment is mistrust. Listless disinterest works well, too.
During this bottoming process we look for progress on the balance sheet. When Bombardier sold off its recreational unit, our interest level grew. But a warning flag waved in May, 2004, when Mr. Tellier negotiated a new compensation package for himself, foreshadowing a lower stock price and a possible exit.
So where are we now? Mr. Tellier is gone, the balance sheet remains weak with a heavy debt load, and too many intangibles are in the asset column. In our view, there are more writeoffs to come. Value-investing maven Ross Healy reckons the stock would have to get down to about $1 a share to be tempting. That sort of evaluation doesn't suggest much downside protection if anything goes wrong. Bombardier class B shares closed at $2.30 Friday on the Toronto Stock Exchange.
Bombardier's recent elimination of the stock dividend helps to conserve cash and removes a potential obstacle to receiving government aid. But its dual-class voting structure remains a thorn in the side of institutional investors.
The combination of high debt, poor asset value and sensitivity to the economy means we could be watching Bombardier from the sidelines for a long time.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.