Special Situations Real Money Portfolio – October 2008

The Special Situations Real Money Portfolio ended the month of October with a balance of $18,508.51. That’s down 3.5% from the September high of $19,181.27, but much better than performance this month of the major indexes. The year-to-date return for the portfolio is an impressive 16.04%. My total return since inception for this portfolio is 85.09%. The annualized rate of return is 24.98% since inception. I am extremely pleased with the performance of this portfolio, especial in contrast to the underperformance of the Fat Pitch Financials Portfolio this past month.

So what have I been doing in the Special Situations Port this past month? I’ve shifted my focus of the portfolio to merger arbitrage opportunities. It appears hedge funds and institutional investors have abandoned this area of the market, among others. Many of these funds used huge amounts of leverage to eke out a decent return from the low spreads on many merger arbitrage opportunities in the past. The massive deleveraging, often forced deleveraging, has caused the spreads on many relatively low risk merger arbitrage opportunities to jump above 10 percent. I’ll admit there is additional risk of merger deals falling apart due to financing issues, but I think that risk is currently overestimated, especially in situations with strong buyers.

This month I once again added shares of Constellation Energy (CEG) when its price dropped back to $22.30. I also shares of Anheuser Busch (BUD) since it is expected those shares will be bought out for $70 by the end of the year by Imbev NV.

I also added a small position in Puget Energy Inc. (PSD). Puget Energy is in the final stages of getting state regulatory approval for the buyout of its shares for $30 per share by Macquarie Infrastructure Partners. Some of the counties being served by Puget Energy are putting the issue on their ballots for the upcoming election. However, Macquarie indicated that the outcome of those elections would not impact its decision to acquire Puget Energy. I’m hoping this merger arbitrage opportunity closes by the end of the month.

To get a complete listing of holdings and transactions for the Special Situations Real Money Portfolio, please consider subscribing to Fat Pitch Financials Contributor’s Corner. In addition to my latest trades in merger arbitrage opportunities, I’m sure I’ll get back into my usual investments in going private transactions and tender offers soon, especial as the credit markets stabalize. The community at Contributor’s Corner is also starting to look at net current asset value stocks that are starting to become more plentiful now that equity prices have declined so much. Contributor’s Corner will track the latest developments in these and other special situation opportunities. If you are not quite ready to commit to subscribing to Contributor’s Corner, you have a chance to win a subscription this month at Value Investing News, where we’ll be giving away three subscriptions to active Value Investing News members as part of the November Contest at that site.

9 thoughts on “Special Situations Real Money Portfolio – October 2008

  • November 3, 2008 at 2:51 pm

    Those are some pretty respectable results that you have achieved in the special situations portfolio. What is your opinion on ROH/Dow merger? The shareholders recently approved the merger. It’s expected to close in early 2009 and there is a spread of over 10%.

  • November 3, 2008 at 8:48 pm

    Wow that is an excellent return. Very impressive given the market condition. I too am finding the spreads have increased substantially as funds are selling out.

    PSD looks good so far. I was on a call with investor relations and she mentioned again that the buyer has committed the capital and is keen to consummate the deal.

    She also mentioned that the regulators have not set forth any specific date for the announcement and they will know the same time as everyone else. Hoping it’s approved within the next week or so.

  • November 3, 2008 at 9:03 pm

    @Dividend Growth Investor The ROH/Dow merger looks pretty good at first blush, but I’ve yet to dig deep on that one.

    @Jae Jun Thanks for the update on PSD. I’m guessing it won’t clear until the election results are finalized.

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  • November 7, 2008 at 9:53 am

    Yes I to have done a little look see on ROH/DOW. You could still make 10% on you money at the current price of $71.80. Deal is suppose to close in January 2009. Buffet is involved in this deal as one of the backers I beleive as well as some middle eastern entity.

    I like both of your sites George(you look alot like the founding father,lol)


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