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2018 Year In Review

|Includes: BLK, CCAOF, CCDBF, CELG, CM, CTPNF, ENB, FB, GNTX, Issuer Direct Corporation (ISDR), IVFH, MGA, MU, PFHO, PSHIF, QUTIF, RY, SEIC, SILC, TPCFF, UBAAF, VMD
Summary

The portfolio returned -7.0% versus the benchmark of -6.6%.

The portfolio MER was 11 bps (trading fees from discount broker).

Over the past six years, the portfolio has returned 17.0% annualized versus the benchmark 9.8%.

The first half of the year was positive, but the second half was negative. Even though the markets fell out of bed in Q4, Q3 at -7.4% was the portfolio’s worst quarter on both an absolute and relative basis. The portfolio underperformed in Q3 by 8.4%. Hey, you can’t accuse me of being a closet benchmarker! The portfolio outperformed the benchmark by 5% in Q4, even though it still lost 7.2%. Overall, for the year I managed to generate -7.0% versus -6.6% for the benchmark (25% in each of S&P/TSX Composite, S&P/TSX Small Cap, S&P 500 and Russell 2000). Over the past six years (since I formalized the tracking), the portfolio is up 17.0% annualized versus the benchmark 9.8%.

Trading fees in 2018 came to a very respectable 11 bps. This was a decrease from 13 bps in 2017.

The Winners

To be honest, there weren’t many. Questor was up 24% in the year. Given the sizable weight in the portfolio, it was largest contributor to performance. Other contributors were AmTrust and Pure Industrial REIT, Perlite and Cortex which were either acquired or a take-out was announced during the year. Sangoma and Kroger, which were both sold, also contributed.

The Losers

Where do I begin! Issuer Direct, which was up over 100% in 2017, deflated about 30% before I sold it. More on that under the sells sector. Silicom and Innovative Food Holdings (OTCQB:IVFH) were down 50% and 52% respectively.

Silicom announced that a major contract that they had won was being cancelled by the client. The company stated that it was not anything due to their execution, but rather a change of strategy higher up at the consumer. They were not able to offset this loss with other contract wins. In fact there has been very little news coming from the company for some time. I’m concerned that they are not winning any new meaningful contracts. We shall see on their Q1 earnings call. The balance sheet is still in tip top shape and the company remains profitable.

Towards the end of the year, IVFH announced the possibility of doing a reverse split and up listing to the NASDAQ. Recently and activist hedge fund has bought a sizable stake in the company. IVFH continues to grow revenue. However, the acquisition they made has resulted in lower earnings in the more recent quarters. I’m optimistic that the activist investor will push for positive changes. Listing on the NASDAQ should help as well.

BlackRock, Facebook, Celgene, Urbana, and the banks were all disappointments as well. I continue to hold all. Celgene had a pop at the start of 2019 when Bristol-Myers Squibb made an offer to acquire it.

The Sells

I will cover sells and buys that occurred since the mid-year report. Warren Buffet has noted that ideal holding period is “forever”. Other than with Canadian bank stocks, I don’t know how many other stocks are good “forever” stocks. At one point I thought maybe Issuer Direct would be.

Issuer Direct (ISDR) was sold in October and early November. I had first bought the stock when it was trading OTC in August 2013. For a number of years it was the largest or close to the largest holding in my portfolio. Overall I did quite well on the stock; however it was disappointing to sell. ISDR reported disappointing Q3 results. Without acquisitions, growth was flat. Net income has been down year-over-year for the past three quarters. What really annoyed me though was that the company diluted shareholders with a share issuance that increased share count by 30%. They have also eliminated their dividend. If ISDR had announced a transformative acquisition at the same time, that would have been understandable. However, there has yet to be any news. I will keep my eye on it and if the shares fall further and/or there is development on what the large cash pile will be used for, I may get back in.

Kroger was sold in October. This never intended to be a long-term holding. I had originally purchased the stock when I thought there had been too much pessimism with Amazon taking over the grocery industry. I took profits to reallocate to other names that the market had beaten up.

Vecima was sold in October. The stock had hung in better than many other names that were down significantly. Vecima was not a high conviction name. I ended up being essentially flat on the name.

AmTrust was sold in September. The stock was just hovering a little below the acquisition value waiting for the deal to close. When I spoke with investor relations, they told me it is expected to close before year-end. I viewed this position as a cash proxy and sold when I saw upside potential in other names.

Sangoma was sold in August. The company announced the largest acquisition in their history. In my view this will significantly change the profile of the company. Subsequent to closing Sangoma will have a much more levered balance sheet and lower profitability. Management wants to continue to aggressively grow the company with more acquisitions. It seems that the market is more interested in profitability than revenue growth right now and I was concerned the company will get re-rated lower.

Perlite was sold in December. Management announced a buyout in October. While it was nice to get a pop in the stock as other names were falling, I had hoped to get a higher return over time. I took advantage of weakness in the energy sector and bought Petroshale.

The Buys

I added to positions in Bank of Nova Scotia, BlackRock, Facebook and Viemed on price weakness.

Magna was purchased in October. I had previously owned the stock but had sold on uncertainties around the new NAFTA deal. In hindsight I sold too soon as the stock continued to rally. However, I had the opportunity to buy back Magna for less than what I sold it for as the stock price tanked in Oct. While there is some concern we are at “peak autos”, Magna is probably the best managed auto parts manufacturer in the world. The company has done a good job of re-investing in their business while also buying back shares and regularly increasing the dividend. I see this stock as a long-term hold.

SEI was bought in October. The stock price had rerated meaningfully. The P/E had come down from 30x to 15x. The company has a long history of growing organically and is very profitable. SEI has continued to buy back stock and it continues to roll out its SWP platform to more clients. The dividend was recently increased by 10%.

Micron was purchased in September. The stock had fallen ~20% from its high and the company had just announced its intention to buy back 20% of its stock after paying off a lot of debt. As well, the valuation was very low. In hindsight I purchased the stock too soon, as it turned out to be a falling knife. That being said, in 2019 YTD it has rebounded off its lows and there seems to be some optimism again in the market for the company.

Callidus was purchased in July. Although it hurts to admit it, from time to time I make boneheaded trades. I had made money on the stock once before on market over-reaction and thought I could do it again. I purchased the stock following the announcement of the dividend elimination and the subsequent nose dive of the stock. I thought this was a prudent move as the yield was way too high and the company wasn’t generating enough cash to justify it. It also gave me comfort that a majority of shares are held internally and there was still discussion on taking the company private. Unfortunately I did not take into consideration the messy balance sheet and crappy underlying businesses that the company holds. The stock has subsequently tanked further. I expect I will sell at some point in the coming months.

2019 Outlook

As I write this part way into January, the market has experienced a nice rebound. It remains to be seen if the optimism will continue. Economists are expecting continued growth in 2019, albeit at a lower pace. Corporate profits should therefore continue to increase. Macroeconomic factors such has headlines regarding US and China trade wars or any number of other events could derail the market. Cash I added to the portfolio in January was used to buy Cortex. The company is getting acquired at $4.55/share. I bought at a discount to the acquisition price, but the return I will get should be better than a high interest savings account. Therefore I am being cautious. I will probably have a preference for larger cap, profitable companies that are growing dividends over time. That being said, if a small cap opportunity seems too good to pass up, then I may not.

Portfolio Holdings (as of Dec. 31, 2018)

Holding % of Total
Bank of Nova Scotia 14.6%
CIBC 9.7%
Questor 8.9%
Viemed Healthcare 8.8%
BlackRock 7.1%
Silicom 5.1%
Facebook 5.1%
Magna 5.0%
Royal Bank of Canada 4.4%
CCL Industries 4.0%
Enbridge 3.6%
Gentex 3.3%
SEI Investments 3.1%
Innovative Food Holdings 2.7%
Celgene 2.3%
Petroshale 2.1%
Micron 2.0%
Urbana 1.8%
Cortex Business Solutions 1.8%
Callidus Capital 1.5%
Titan Logix 1.4%
Cash 1.0%
Pacific Health Care Org 0.6%
100.0%