Special Situations Real Money Portfolio October 2009 Update

The Special Situations Real Money Portfolio is a real Coverdell Education Savings Account I created for my son on October 19, 2004. I decided to dedicate this small tax sheltered account to special situation opportunities and Graham style stock workouts. Back in 2004, the primary focus was on going private transactions. Since then, I have also added tender offers, spinoffs, split-offs, net-nets, merger arbitrage, and some other unique event based opportunities.

This little investment experiment worked out much better than I ever dreamed it could. In fact, the results were so good it drew a lot of traffic to the going private transaction table I maintained here on the blog. It seemed that as soon as I posted a deal on the going private transactions table, the profit margins would evaporate.

I also became worried that some of the attention would make it back to the companies that were going private. There is always the danger that they could restructure their offers to the detriment of small individual investors. Therefore, I decided to put the going private transaction list behind a password wall and I created the premium service that I now call Fat Pitch Financials Contributors Corner. In Contributors Corner, I still maintain the going private transaction list and I also now track odd-lot tender offers, cash mergers, spinoffs, net-nets, and manage an active members only forum dedicated to discovering and discussing special situations.

This past month, the Special Situations Portfolio held steady. As I reported last month, the Special Situations Portfolio closed out September with a balance of $26,594.77. When the market closed on October 30, 2009, this account was worth $26,235.05. That’s down 1.4% for the month. Most of that decline can be attributed to one merger arbitrage opportunity that I recently entered, which has subsequently declined in price.

The year-to-date performance for the portfolio remains a strong 41.38% return. Looking back at the portfolio’s performance since inception on October 19, 2004, the Special Situations Real Money Portfolio has produced a total return of 162% as of the close of business on October 30, 2009. The average annualized return since inception remains an amazing 29.0%.

I entered three new positions this month. The names of those stocks are available to members of Fat Pitch Financials Contributors Corner. They include two merger arbitrage plays and one small going private transaction.

I only completed one transaction in October and it involved New Horizons Worldwide (NEWH). Back on April 20, 2009, I bought 24 shares of New Horizons Worldwide at $0.56 per share. My total cost for this tiny transaction was $20.39. This reverse/forward stock split going private transaction was expected to pay out $1.85 per share in cash to shareholders holding less than 25 shares. There was not much profit potential in this transaction, but I thought it would make for a great learning opportunity for new special situation investors. I only picked up these shares when the price dropped significantly down to $0.56. Limit orders are critical on these types of trades given the low liquidity. On October 9th, I was finally cashed out. I received a total of $44.40 for my 24 shares.  That comes out to a 118% return in less than six months. It’s hard to turn down that kind of return, even if the overall payout is only $24.01.

I hope next month I’ll be able to share the results of some larger transactions. Until then, you can track my current trades by becoming a premium member of Fat Pitch Financials Contributors Corner.

Disclosure: I no longer own shares of New Horizons Worldwide (NEWH).