Record Performance for the Special Situations Real Money Portfolio

The Special Situations Real Money Portfolio closed out the month of April with a balance of $21,478.13. That’s up 14.2% from the $18,800 portfolio balance at the end of March. If I’m correct, I believe this is also a record high balance for this portfolio. 

For those of you unfamiliar with this portfolio, the Special Situations Real Money Portfolio is a Coverdell Educational Savings Account that I started for my son on October 19, 2004. I decided to focus this portfolio on special situations, or what Benjamin Graham called workouts. The majority of the earlier investments were in going private transactions, but as I have discovered new opportunities, I have branched out into tender offers, split-offs, mergers, net-nets, and other unique opportunities that I have researched or that have been shared by the Fat Pitch Financials Contributors Corner community.

So far this year, the Special Situations Real Money Portfolio has outperformed the indexes with a year-to-date return of 15.75%. The S&P 500 total return year-to-date has only been -2.5%.

Looking back at the overall performance of this portfolio since inception, the total return is a whopping 114.79%. The annualized growth rate has now climbed to 26.37%. I believe that is the highest annualized growth rate I’ve ever reported and exceeds my outrageous goal of maintaining a 25% rate of return.

Let’s take a look at some of the completed transactions in April that helped me acheive this amazing performance. First, I started off by opening an order for FortuNet (FNET) on April 6, 2009 at $2.74 per share. FortuNet first appeared in Contributors Corner in March as a stock trading below 2/3 net current asset value. Then on March 24th, a member of Contributors Corner notice that FortuNet was proposing to issue a $2.50 per share special dividend. Shares were only trading at $2.78 at the time, so the market was only valuing the company’s assets and business at $0.28 per share! I couldn’t believe it, so I looked over the business again and decided that this was a fat pitch worth swinging at.

It took me until April 9th to accumulate 549 shares of FortuNet. In retrospect, I probably should have raised my limit order a bit, since I really wanted to acquire 2,000 shares. There is always a fine line between maintaining pricing discipline and missing an opportunity.

Eventually, the market finally figured out this bargain. After the special dividend was approved by shareholders and a clarification was posted on April 19th regarding the record date of the dividend being April 27th, the price of FNET shares finally caught up with reality. On April 21, 2009, I decided to sell my 549 shares at $3.85 per share. At that price, FortuNet was selling significantly above its net current asset value and I was concerned that this gaming machine manufacturer faces significant headwinds in their industry given the current economic climate and decline in revenues in the casino sector. My total profit for this trade came to $588.48, a gain of 38.8% on my investment. The average annualize rate of return given it only took 16 days comes out to be a staggering 884%.

The next day, I decided to sell another position, Movado Group (MOV). Last month, I wrote about how Movado Group stock was trading below Graham’s 2/3 of net current asset value criteria. I bought 200 shares at $7.61 per share on March 23, 2009 and then I added another 200 shares at $7.15 on April 13th after the disappointing new quarterly report was released. I calculated the net current asset value of Movado Group to be $11.10 per share using the Jan 31, 2009 balance sheet. Therefore, two-thirds of the NCAV is $7.33, so I decided to buy more when the price of Movado shares dropped below that threshold. I’m sure Movado Group will continue to struggle with sales this quarter, so when Movado shares jumped up to $8.61 on April 22, 2009, I sold all 400 shares. My total profit for this trade came to $471.06, a 15.9% gain on my investment. Considering this investment all occurred within 31 days, the average annualize rate of return for this play came to 187%.

Finally, I received cash for a tiny little going private transaction reverse split for Grill Concepts (GLLC). As I mentioned last month, Grill Concepts was going private through a reverse stock split, where every 35 shares would become 1 share in the future. Those holding less than 35 shares will be getting $1.50 per share in cash. I bought 34 shares of Grill Concepts on February 24, 2009 for $0.35 per share and finally on April 22nd I received the cash for this deal. My total profit for this trade was $32.15 after expenses, but the net gain was 170.6%! Even though the total profit potential for this trade was tiny, I think it was perfect trade for someone who was just getting started in special situations and wanted to learn how these going private transactions work.

I must admit that it is getting harder and harder to find good special situation opportunities in this market. I currently hold $9,249.31 in cash, which is 43% of the portfolio. I will be working hard to uncover some new opportunities to put this cash to work. You can follow my efforts by subscribing to Fat Pitch Financials Contributors Corner. There you will also be able to see the complete history of the Special Situations Real Money Portfolio along with its current holdings.

Disclosure: I no longer hold shares in FortuNet (FNET), Movado Group (MOV), or Grill Concepts (GLLC).

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