March 10, 2013 Comments

Melcor Developments is updated and rated (higher) Buy at $18.61. This is a very well-managed Edmonton-based company that has traded on the stock exchange since 1968 and which traces its roots back 89 years under the ownership of the same founding family. Earnings are cyclical and the stock price can be highly volatile. I first added it to this site in late 2002 rated Strong Buy at $3.60 (Actually at $36.00 but it later split its stock 10 for one). Since 2002 the assets on the balance sheet have increased from $209 million to $1447 million (boosted somewhat by mark-to-market valuations on rental properties). This company illustrates how owning shares in companies can work. The company does pay a dividend. But it retains most of its earnings to grow the business. And those retained earnings have greatly benefited share owners. Anyone who argues that companies should always dividend out as much of their earnings as possible (or even pay any dividend) is dead wrong in the case of companies like Melcor.

By simply hitching a ride at a time when the share price is reasonable investors who bought and hold did very well indeed.

However, Melcor’s shares did soar to the unreasonably high price of just over $30 in the Spring of 2007. The shares rose about 500% in just over two years. The shares were over-valued at that point.  In late 2008 through early 2009, Melcor shares traded as low as under $4.00. This was during the financial crisis (which turns out to have been the financial opportunity of a lifetime). At $4.00 Melcor shares were extremely cheap and far cheaper in relation to book value than at any time since I began following the company in late 2002. This illustrates the fact that both the quality of a company and its price are very important factors.

With a company like a Melcor a reasonable strategy is to have a default position of buying and holding. But also be prepared to buy on dips and be prepared to sell if the market exhibits irrational exuberance about the stock.

I am comfortable holding this stock although I realize it can fall significantly in times of recession in the home building industry in Alberta.


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