Benj sometimes received criticism after he was on BNN Bloomberg, like “You constantly talk about your mistakes, but your track record is great, and you should talk more about the winners.” Well, errors happen and learning from them is important. The first step to studying them is recognizing and admitting them.
As the Contra Guys moniker suggests, we are selecting shares that have been beaten down, usually badly. The question is: Will they return to previous form? Rarely is the answer simple and though some investors talk about slam dunks, from where we sit, those are few and far between.
Many investors believe that one must have a minimum 50 per cent of their selections make positive returns to be successful. If the number is much higher, the results, all else being equal, will be much greater. Under our system, one can prosper with less than half of the stocks working out. Why? That is because we always seek home runs and grand slams with a minimum of 100-per-cent-plus upsides – often four or five times that. When that happens, it handily offsets the losers.
But still, the dogs can be painful. Unlike Vaalco (EGY – NYSE), which returned 10 times Benj’s investment in less than two years, there’s DSS Inc. (DSS – Nasdaq AMEX). Benj bought it at US$1.56 last year with an initial sell target of US$5.24. It tanked. As with all our picks, the pros and cons were pondered, and though he saw numerous red flags, the positives and the potential upside led him to plop down some money.
One assessment that must be made when acquiring a position is how much money to throw at it. Many people use the same amount for each purchase, but we prefer a one-to-four weighting system. What this means is that after attempting to calculate the risk and reward for a stock, more cash will be dedicated to it depending on our confidence in the buy. For example, say the minimum a person wants to dispense on any purchase is $10,000, the maximum would then be $40,000. You can read more info on this methodology here. In the case of DSS, because of the tremendous uncertainty, the purchase weighting was a very nominal 1.38. Thankfully.
Why did Benj buy? The executive chairman, Heng Fai Chan, who assumed this role in 2019 after serving as a director since 2017, appears to have a tremendous track record. This gent specializes in restructurings and corporate transformations, and these have included American Pacific Bank, China Gas Holdings, Heng Fai Enterprises, Global Med Technologies and Singhaiyi Group. He has also served on the boards of a heap of other enterprises. But when reading on the corporate website that his “previous service record further highlights his extensive business acumen,” Benj’s cynical spidey-sense was aroused. Unfortunately, not enough to avoid this outfit.
The curriculum vitae of CEO Frank D. Heuszel is also very impressive, and one can see why he was appointed to this position in 2019, about a year after commencing on the board. He had a long career as a banker and specialized in business turnarounds. It appeared that this corporation had an excellent leadership combination to do just that. Thus far, no. But one can opine that it is still early days, and these people might indeed make a major reversal happen.
To do that will require taming a Medusa-like conglomerate. There is Premier Packaging, along with Impact Biomedical, a health information software company. AAMI/AMRE is a medical real estate investment trust. Alset Title is also in in the real estate business. Then there is HWH World, another company in the health care sector, and DSS Blockchain Security.
All this for a company that was trading at a skinny 37 US cents as of Tuesday and offers relatively lowly revenues that last year were just north of US$28-million. Heck, it must be a bargain, no?
Certainly, by some conventional metrics it is. The book value sits at a lusty US$1.86 a share. Insiders own about 40 per cent and have been buying, with no sales. The last quarter was cash-flow-positive for the first time in years, although the forecast is that it will be negative this year and the enterprise will be unprofitable.
The executive team is very optimistic in its plans. In a letter to shareholders in February, the CEO rhapsodized poetic about the future. He suggested that this will be a “breakout year” and that the corporation of two years ago with US$16.2-million in assets has grown to US$219-million and with cash of US$69-million. The company raised US$121-million over the past year that contributed to the dramatically increased share count of 2.1 million to 84.6 million over the past couple of years.
So, does this stock have the upside that was originally perceived, or even a reasonable amount of positive possibility, or is it just a value trap at this lowly level? And would it be worthwhile to take the loss now to save money on taxes, while considering repurchasing the position after the 30 days when the loss can be written off. Being a successful investor is not just about winners. The flipside of the coin is how one plays the dregs.
After much knuckle-mashing, at this point Benj will hold his position, preferring inaction over action. He also normally avoids selling a dog until two years have passed since the purchase. Plus, though it could happen, the probability of DSS going much lower seems limited and the upside could be huge – although pushing north of $10, where it traded a mere two years ago, seems like pie-in-the-sky. Of course, holding could be an error and choosing too many dogs like this will severely dent his 10-year, 19.1-per-cent annualized return. The learning continues.
For those who want to yak about stocks and the economy in person, Ben and Benj will be at the MoneyShow in Toronto on September 17th. Benj speaks at 4:30 PM. Free admission here.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.