Special Situations Real Money Portfolio regained some ground in February. The ending balance on February 27, 2009 was $17,984.99. This is up 5.26% since January. Nevertheless, the portfolio was still down 3.08% since the beginning of the year. You would think I would be happy with the performance in February, but I am not.
The month of February started off great with the completion of the Meadow Valley buyout (MVCO). That play brought me a 16.9% gain on my original investment. Given that I only held the shares for 66 days, my average annualized return came out to 93%. I didn’t expect this deal to work out so well, especially given that the buyer was trying to squeeze down the price.
The next special situation that came to completion in February was Puget Energy (PSD). I ended up selling my shares for $29.95 per share on February 6, 2009. The total proceeds for the 78 shares I held was $2,329.13. Then I received an additional dividend of $19.50 on February 17th. My total return for this trade was $617.88, a 35.7% total return on my initial investment. My average annualized rate of return for this special situation was 110% including the time it took to receive the dividend.
On February 6th, I also received cash for the 100 shares of NDS Group (NNDS) I had picked up in January. I only had these shares for 25 days. The total return for this trade was 6.1%. If you factor in the 25 days, the average annualize rate of return for this trade came out to a nice 89%.
All this new cash started to burn a hole in my pocket, so I went shopping for new special situations. Late in the day on February 6, 2009, I bought 965 Emageon (EMAG) shares at $2.59 per share. This is in addition to the 250 shares I already purchase on January 30, 2009 for $2.44 per share. That turned out to an unfortunate special situation to get involved with. For all intents and purposes, this looked like a fairly low risk merger that was in the final stages. However, the financing for the deal was being done Stanford International Bank. Just before the market closed on February 10th, a member of Contributors Corner warned us of a blog article detailing concerns about Stanford International Bank. I dismissed the article since is was only posted hours before the Emageon deal was suppose to close, so it seemed like disinformation to create doubt and uncertainty before this deal was going to close. I also couldn’t verify any of the information provided in the article in a timely fashion. It turns out I was wrong and Stanford imploded when the financing for Emageon never arrived. I immediately bailed out of this stock on February 11th at the market open for $1.65. However, only 1,000 of the 1,215 share I held sold at that price. I tried to sell the remaining 215 shares at a reasonable price, but the shares of EMAG dropped all the way down below a buck even though the net current asset value was higher. Eventually when word of a new buyer came out, I sold the remaining 215 shares for $1.73 per share on February 24th. I lost 35.% in all on this investment. At first I thought I might have made an error on this special situation, but after looking back on it, I realize that there was little I could do to research Stanford given the value of my investment. I factored in the probability that something bad might derail this merger and the returns still looked good. I think as special situation investors we just need to realize that we have to take some losses on random events on occasion and not let ourselves become so cautious that we miss out on all the great opportunities. The best way to mitigate this risk is to make sure we never invest too large a portion of our portfolio in any given opportunity.
Finally, I got involved in one more deal in February. I picked up 400 shares of American Land Lease (ANL) on February 6th (a very busy day) for an average price of $13.55 per share. At first I bought 200 shares for American Land Lease at $13.62 thinking I had a bargain. Then I added another 200 shares at $13.48 when the market decided to drop the share price down lower. I usually don’t get involved in third-party tender offers, but when Green Courte Partners extended their tender offer for American Land Lease until February 17th in order to get any remaining stragglers (93% had already tendered), I couldn’t resist their $14.20 per share offer. It seemed like a great fat pitch to me. Thankfully, it was! I received $14.20 per share on February 23rd. My gross return for this deal was 4.4% after commissions and fees. Given it only took 18 days, this little tender offer produced an average annualized return of 90%! I needed that after the Emageon debacle.
The bottom line is that this past February was one of the busiest ever for the Special Situations Real Money Portfolio, but all that activity really didn’t generate a positive net return. I was still down 3 percent for the year. However, I’m still very happy with the long term performance. The portfolio on February 27, 2009 had a total return of 79.85% since inception. The internal rate of return for my Special Situation Real Money Portfolio is 21.06%.
Disclosure: At the time this article was posted, I no longer held shares of PSD, MVCO, NNDS, EMAG, and ANL.