Here is a reality check on stocks from south of the border that were featured in this column over the past year.
In February, 2006, Air France-KLM American depositary receipts (AKH-NYSE), then trading at $24 (U.S.), looked to us like a heavyweight with low expectations in a beleaguered arena and apt to outperform those companies judged to be the class of the field; in this example, Southwest Airlines Co. (LUV-NYSE) and WestJet Airlines Ltd. (WJA-TSX).
That was then, how about now? Southwest is stuck in a holding pattern; then trading at $16.42, it's now $16.22 for a small loss. WestJet has done much better; then $10.89 (Canadian), it has climbed to $14.45 for a tidy 33-per-cent gain. But Air France has trounced its youthful rivals, currently flying at $45.22 (U.S.) for a blazing 88-per-cent increase.
Also last year, we looked in on the U.S. funeral business. Service Corp. International (SCI-NYSE) was trading at $8, much improved from where it used to be, but still in the process of shaking off legal troubles. Competitor Stewart Enterprises Inc. (STEI-Nasdaq) which we also own, was trading at $5.12 and recovering from damage inflicted by hurricane Katrina to its operations in the southern United States. Since then, Stewart has clawed its way back up to $6.45. But Service has been the big surprise, buying out Alderwoods for $856-million. This has made us a bit nervous, as Service got into a heap of trouble a few years ago by expanding too fast and taking on too much debt. However given that competition in this field has diminished over the years, this move will likely improve margins. Investors have been upbeat, sending the stock up to a lively $10.69. It still has a way to go, though, to hit our target of $13.84.
In April we examined Sea Containers Ltd., a favourite holding of value investor Irwin Michael of ABC funds. Though we have tremendous respect for Mr. Michael, and agree with his point about buying assets at a large discount to book value, we had grave doubts about this one. Instead of turning around, the company appeared to be sinking fast. In fact, one of us tried to short it at $6.50, but was unable to borrow shares. That's a shame, because as anticipated, the debt holders torpedoed the corporation, forcing it into bankruptcy. It's now trading on the pink sheets at $1.30 a share.
We all make mistakes. In fact, in May we hung out one of our own boneheaded moves, our "investment" in MRI manufacturer Fonar Corp. (FONR-Nasdaq). Though the stock had crashed to 26 cents from our purchase price of $1.25, we stuck with it because the chief executive officer had just bought shares at 55 cents, and management told a sweet story about the stock getting back over $1 by year end. No dice. We finally pulled the plug and took the tax loss at 30 cents, not far from its current trading price of 27 cents.
Though we were early in calling a top in real estate, in June we gamely talked about it again, in particular looking at a couple of outfits that looked vulnerable in our assessment, yet had garnered enormous interest from U.S. hedge funds. Did these big players know something about the real estate cycle that eluded us, we asked?
Mall developer Mills Corp. (MLS-NYSE), then going for $28.65, was up for sale. No buyer was found and, last week, Mills admitted that bankruptcy might be the only way out of its debt burden, sending the shares to $15.21. Frankly, we're amazed the fall hasn't been more severe and reckon it is still a good short candidate, though obviously the timing could have been better earlier.
Back in the real world, here are our actual results for the Contra portfolio for 2006. The return was 9.1 per cent, not bad on an absolute basis, but the market indexes were nicely ahead. Our five-year annualized return now stands at 29.0 per cent and the 10-year number is 23.4 per cent.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.