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Paul Sullivan

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Keeping the bogeyman at bay

Paul Sullivan

  

With the TSX and Dow up and down like yo-yos, one is tempted to find safe refuge in the funds of foreign nations, perhaps a foreign exchange ETF. After all, the global economy is turning up a few unlikely superstars. Try Hungary, up 268 per cent, or India, up 308 per cent. India, where 60 per cent of the population is under 32 and the emerging middle class is 300 million strong. Go east, young investor! Or, you could be like Warren Buffett, who likes to stick close to home in Omaha, and find sanity and value in stocks from companies that you know. (Although, Mr. Buffett recently invested in an Israeli tool-making company called Iscar. Exception proves the rule).

It’s hard to argue with the idea that knowledge - information - is power. If you know a company really well, and you have information indicating that company will do well, then it makes sense to invest in that company. Doesn’t it? Well, there are all kinds of knowledge traps. If you’re feeling good about a company, you have a tendency to look for information that supports your case. If knowledge were the magic ingredient, analysts and business journalists wouldn’t need to be analysts and business journalists. They’d be as rich as Mr. Buffett. Or at least David Radler, who once scoffed at “editorial economics” in my presence. Of course, he’s been forced to give a lot of his riches back. But that’s another story… When this assignment came across the transom, I remembered that I used to track a basket of companies on a weekly basis for a Globe Investor Gold column. I got to know those companies quite well, and three of them in particular impressed me as quite well managed. So, I thought I’d check out how those companies were doing and see if what would have happened if I had traded on the knowledge I acquired through a pretty thorough examination of the news and information available - all of it public - supplemented by a number of interviews with principals such as Rick George (Suncor), Izzy Asper (Canwest), Ian Telfer (Wheaton River then, Goldcorp now).

I live in Vancouver. All of what I called Sullivan’s Selects were based in BC or Alberta, with the exception of CanWest, which is based in Winnipeg, where I grew up. I knew the environment; I read the daily business pages; I knew the markets and I could say “hi” to any one of the managers, and on a good day, they’d say “hi” back. I also knew the guys (and they were all guys) who followed them for the brokerages. I had them covered.

I chose these companies because they were all publicly-traded companies that were leaders in their sectors and iconic representatives of western industry, not because I wanted to own them. I had to take nothing on faith - except my own. Of course, I fell in love with several of them, but because I was writing about them, never owned a single share.

I started following them at different times throughout 2003, as some of the originals were bought out or folded. But, enough of them survive today, 4 years later, to test the theory that knowledge is investing power.

Honestly, I believed that Suncor Energy Inc. was the most promising company in the group. Rick George seemed exactly the right guy to fulfill the promise of the oil sands. An American by birth who became a Canadian, Mr. George was the Alberta Business Person of the Year in 2001. I started tracking Suncor on May 5, 2003, and the price was $25.18 a share. Today? It’s $82.63. I’m rich! Wait a minute…it was all a dream. I forgot to buy the stock. Darn! Now, of course, this might be a good time to sell, as global warming has made refining the oil sands a planet-unfriendly activity. But still, that would be a gain of $57.45 a share, more than two times the original price. My work is done here… Suncor wasn’t the only Sullivan Select I fell in love with. My other favorite was Finning International Inc. I liked Finning because at one point it was on a run of 40-plus profitable quarters. Not bad for a Caterpillar tractor reseller. It just made sense that Finning, which supplies heavy equipment to the Alberta miracle, would grow right along with Ralph Klein’s waistline. Originally a BC company, Finning moved its head office to Edmonton to be closer to its crop - the Athabaska oil sands. I admired their focus. But, did Finning keep its focus? Well, when I started tracking Finning in July 2003, it traded for $32.90 a share. Today? It’s $52.20. Not as good as Suncor, but still pretty respectable. And, at the end of 2006, it had a $1.5-billion backlog of orders, a record, so unless it becomes illegal to refine the oil sands, Finning looks like a good bet in ’07, too. But I don’t own any of its shares either.

The last of my top three was Methanex Corp., a Vancouver-based company that is the world’s leading manufacturer of methanol, a petrochemical refined from natural gas that is used in making everything from foam pillows to acetylsalicylic acid (ASA). As far as I was concerned, Methanex cured more than headaches - it was good for what ailed your bank account. It’s the world’s most useful chemical, and it’s especially important in construction materials, from particle board to foam insulation. Checked out the construction industry in Western Canada lately? I was mildly concerned about the rising price of natural gas, but Methanex has done a good job of securing a stable supply. So in April, 2003, Methanex was listed at $13.20. Today, it’s down from it’s 52-week high of $34.80, but is still trading at a respectable $26.40, exactly twice as much in 4 years. I am good.

Ok, ok. It’s not all Karnak the Magnificent. Back in September, 2003, I profiled Wheaton River Minerals, which I believed to be a gold company in the Howe Street tradition of gold companies, that is, a fool’s gold company, better at mining the pockets of gullible investors than extracting gold from the earth. Little did I know that CEO Ian Telfer would manage to evolve that stock, which was trading at $2.89, into a virtual takeover of Goldcorp, a venerable and respectable Toronto gold mining company, sitting on one of the world’s richest gold mines in Red Lake, Ontario. Goldcorp, thanks to Mr. Telfer’s subsequent acquisitions, especially Glamis Gold Ltd. last August, has become one of the world’s largest gold mining companies with assets of $21.3-billion (U.S.). Now Telfer Inc. trades at 10 times its 2003 value, or $28.40 (Canadian). So much for knowledge.

And not all the Sullivan’s Selects have covered themselves in success over the last four years:

So with a little selective reporting, most knowledgeable stock pickers can make themselves look good in hindsight. After learning what happened to all those stocks I didn’t buy, I admit, I’m relieved that I stayed on the sidelines, and invested in real estate funds! The losses don’t quite outweigh the gains, but it’s close. At one time, each of these companies showed great promise, even, or should I say especially, in their own back yard. Familiarity does not necessarily breed contentment.

Paul Sullivan is a longtime Vancouver journalist and president of Sullivan Media. He also writes for The Globe and Mail.

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