Do not let anyone tell you a savvy investor cannot make money in this market.
While it is true North American markets sold off significantly in the seven sessions directly following the U.S. election as investors again focus on the “fiscal cliff” — a series of tax hikes and spending cuts set to take effect at the start of 2013. It is our belief that the recession in Europe and slowing in China present more real challenges, but investors tend to be myopic these days and the cliff is staring them in the face.
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So the Dow has fallen 5% as investors worry about higher dividend and capital gains taxes. And the TSX is off 3.9% since the election as worries about a sudden slowing of economic growth would be bad news for a resource heavy market like Toronto’s, since a lessening of demand for oil and metals would put pressure on mining and energy stocks.
But there are individual stock specific situations making us great money even with these concerns.
We are happy to report this Monday morning we awoke to excellent news from our Top Small-Cap Pick from March of this year. The Brick Ltd. (BRK:TSX), a stock we recommended in the $3.50 range just 8 short months ago, announced that they had entered into a definitive agreement to be purchased by Leon’s Furniture Limited (LNF:TSX) by way of plan of arrangement for $5.40 per share. The total consideration payable to The Brick shareholders and warrantholders is approximately $700 million.
Our return was approximately 55% in 8 months in a market (the TSX) that is down just under 3% on the year.
The lesson – the broader markets have been fairly valued for some time and are not the place to be. There is value out there and the smart money is uncovering it and we are recognizing tremendous gains in overlooked stocks. The key is to be very stock specific, patience, and very selective.
In the case of The Brick, the story was one of a significant restructuring and turnaround. At the time of our recommendation, the company was generating in the range of $100 million in cash flow with a strong balance sheet. From a valuation perspective, The Brick was trading at around 4 times cash flow a discount to its peers and appeared ready to introduce a dividend (catalyst), which it did, and appeared like a potential takeover candidate (ultimate catalyst).
The Brick is not the first company directly from our recommendation list that has been taken over and produced strong gains in our portfolios. In fact, it is just one of 7 companies from active BUY list in the past 18 months. Additionally, we have seen 7 more premium takeovers in 2012 from our 2012 Cash Rich, Profitable Small-Cap Stock Report – which we are updating with new stocks for 2013, slated for upcoming release.
While the ‘fiscal cliff’ is a worry, and the state of government and debt in Europe and North America are without doubt worrisome, this ‘fear’ has consistently created opportunities. We continue to selectively seek these types of companies and present them to our loyal client’s overtime.
Congratulation to all who purchased The Brick – this was a significant win in what has been a poor broader market in 2012.
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