Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter
Our last column of 2019 was about Pengrowth Energy Corp., and how it was a lump of coal in Benj’s stocking.
He bought at $4.16 and sold on the takeover at a nickel per share. That is how you postpone retirement!
An article that we wrote in the fall of 2011 was about Bank of America Corp., then trading at $6.40.
When we bought, the company was losing bags of money and government officials were threatening to break up the enterprise.
The bank’s quarterly dividend had been slashed to a penny a share. US$8.5-billion – with a “b”- was paid to settle fines for the subprime mortgage fiasco. Remember that nightmare? Chapter 11 for this enterprise was touched upon, but there was consideration that this was in the “too big too fail” category.
Given all this “delightful” news, we acquired shares at $6.76 and set the initial sell target at $38.74. Seems logical, non?
A major part of our belief in the company was our confidence in chairman and CEO Brian Moynihan.
He had a stellar career, and his bulldoggish qualities seemed to be what the bank needed to navigate the treacherous waters.
Of course, this institution had been a leader in its field for eons, and the fact that it is the Bank of America, seemingly America’s bank, made it, in our minds, less likely to go bust. That would have been a huge blow to the American ego.
Besides the capital appreciation potential, it seemed apparent that if the corporation recovered, the dividend would pop. It has to the tune of five increases to the current level of 18 US cents a quarter. Still more upside is expected.
Quarterly revenue reported this week was US$22.35-billion, down from a year ago but ahead of analysts’ estimates. Earnings came in at 74 US cents, up from 70 US cents. The book value moved up a strong 9 per cent to US$27.32.
We sold 28.5 percent of our position at US$33.75 in December for a 399-per-cent gain.
It is not our normal strategy to sell winners at the end of the year as by waiting, tax deferral would be our friend. But the stock had jumped to 16.5 per cent of the portfolio. That is high.
Combined with First United Corp. and First US Bancshares Inc., the three tallied about 38 per cent. Those dominated the portfolio of 20 positions. The sale of BAC clipped 4 per cent off that total. Yes, diversification was the primary consideration here. In addition, our belief that a recession is in the cards before the end of 2021 suggested that trimming our holdings made sense.
Worth noting is that the sale was also less than our initial sell target, which is also something that we rarely do. Reaching that goal does seem eminently reasonable and is far less than the US$53-plus where it traded prior to the 2008 collapse.
Our current strategy is to buy less and sell more.
Ultimately, in the two portfolios we manage, only one purchase was made in 2019, which likely left some of our subscribers looking for more action. But with 20 holdings in the portfolio that Benj manages and 21 in Ben and Phil’s, we have plenty of positions to be sure.
The 2008 recession, when investors were running like scared rabbits, was a primary time to buy, because a recovery is always a certainty. The question of course was when and that is something that is only known retrospectively.
Everyone who invests in stocks for several years will have losers.
If we count Pengrowth at a 100-per-cent loss -not quite but close enough albeit there were some dividends- it is necessary for other positions to counterbalance. Colossal gains like BAC offset many errors. This is a reason that we virtually always swing for the fences in the Contra portfolios and accept the nominal number of blowouts that occur.
That is far different than the current modus operandi of the masses, throwing money into passive ETFs and matching markets. That will prove financially debilitating when stocks plunge – and they will.