Tax Loss Losers That Should Rebound In 2014https://seekingalpha.com/article/1922431-tax-loss-losers-that-should-rebound-in-2014
When you come off a year where the market is up over 30 percent, you have to expect investors will be doing as much shielding of capital gains as possible by selling any stocks that are down from their initial price. And for some stocks, the tax loss sell off has hit them especially hard. So it is quite likely that several of these stocks will rebound with the artificial selling pressure off of them in 2014.
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With this theme in mind, I have featured several dividend bearing stocks that I have recently bought with the belief they have fallen into this category:
Each of these companies has a different reason for falling out of favour over the course of 2013, but in all instances the company has either remedied the problem or overcome the issue. One of them* I have previously featured in an earlier Seeking Alpha article.
Alaris Royalty Corp.
Alaris is a Canadian company that provides alternative financing to a wide range of private businesses in North America. They offer long-term equity capital to companies for whom traditional debt or private equity is not typically available or attractive, including privately-held companies whose owners want to retain long-term control of their business. They do so in a manner that allows them to provide an attractive, stable yield and liquidity to their investors.
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As the chart shows Alaris was cruising along to a record year right up until they announced on December 13 that one of their investments, SHS Services Management LP, had filed for receivership.
SHS operated the Sears installed home improvement business under the brand name, Sears Home Services. The company offerings included products and services such as HVAC (Heating, Ventilation and Air Conditioning), windows, doors, roofing, home décor, gas fireplaces, carpet, and furnace duct cleaning. SHS employed approximately 650 workers nationwide. SHS provided its services directly to consumers and operated sales and warehousing out of more than 80 Sears retail locations Nationwide as well as 8 other facilities throughout Canada.
With the competition issues that Sears had been facing in Canada, (most recently with the arrival of Target), the company was in a situation where it has been closing stores. This in turn impacted SHS apparently.
Alaris had only just invested in SHS in March of 2013. The initial invest was $15 million via a Preferred Share LP. The investment was slated to return approximately $2.5 million per year. SHS paid its monthly distributions right up until September whereby Alaris agreed to forgo receiving them for a period of five months while SHS worked through some cash flow issues.
Alaris announced this situation to its investors in early November. In conjunction with the deferral of dividend payments, they also announced another $2 million investment via a secured short term loan.
Approximately one month later, Alaris announced the continued bad news on SHS. And while it appears the $2 million dollar loan will be recoverable, how much if any of the initial $15 million investment will be recovered is not known at this time. The loss on this investment according to theirpress release will result in a decrease of cash flow of approximately 3% or $0.065 per share.
From an investment perspective, the company had no debt as of Q3 and investments in 13 other functioning companies. According to their Q3 Balance Sheet they have approximately $411 million worth of investments (Promissory Note Receivables and Preferred LP Units). The Basic Shares outstanding was given as 28.7million. Cash flow from operations generated for the first nine months was $29.2 mm.
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(Source: MD&A - English - Sedar)
Alaris has a track record of consistently increasing their dividend. In 2013 they started the year with a monthly distribution of $0.105 and increased it to $0.115 in June. Then in July they increased it once more to $0.12 where it currently sits. As per the December 13th press release, net cash from operating is now expected to be $1.83 per share and the dividend would consume $1.44 of it giving them plenty of flexibility going forward.
So why will Alaris rebound? You can always count on the market to either over react or under react but very rarely does it get it right in the short term. I think in this instance the market over reacted. The company invests in what could be considered high risk investments. From what I can see, they haven't had any major problems until now and given the space they are in it was likely way overdue.
The analogy to this is similar to an airplane crash. They unfortunately occur despite all the controls and checks put in place. And when they do, every aspect is examined to see what went wrong and what can be improved. Given the SHS situation, the company will do an autopsy to figure out where they went wrong and as a result their investment process will be stronger going forward.
So as investor confidence returns, so will the price appreciation.