It is amazing how quick things can change in just two months. When I last reported on the performance of the Special Situations Portfolio back on July 7th, the portfolio had closed out the month of June with a balance of $14,854.79. Now at the end of August, the portfolio is back up to $17,355.52. That’s up 16.8% since the June closing balance!
What’s been going on? In one word, it is split-offs. In August, I closed out two positions in companies that split off shares of their subsidiaries via stock exchange offers. The two split-offs involved Kraft (KFT) and Loews (L).
On July 18, 2008 I added 99 Kraft shares at $29.51 per share in the Special Situations Real Money Port because Kraft announced that it would be splitting off Ralcorp Holdings (RAH). Kraft intended to provide a 10% discount to the per share value of Ralcorp common stock and odd lot holders had priority in the tender offer, so I was very interested in this deal. On August 13th, I received 65 shares of RAH for the 99 shares of KFT that I tendered. Then on August 14th I completed the whole split-off deal by selling the 99 shares RAH in my account for $59.99 per share. The total proceeds from the sale came out to $3,892.40 for RAH and $21.41 in cash for fractional shares.
How did I do? Since I paid $2,928.44 for the 99 Kraft shares on July 18, 2008, my net profit for this split-off is $985.37. That is a 33.6% return in less than 1 month! This 28 day deal earned me a 439% average annualized rate of return. It’s been a while since I’ve been able to report this type of performance.
The second split-off was of Lorillard (LO) from Loews (L). Way back on January 4, 2008 I purchased 99 shares of Loews for a total cost of $4,827.26. I bought in on this deal way too early. It took until June 18th for the Loews shares to be exchanged for 69 Lorillard shares. My position was unhedged, so market risk really hit me hard on this one. In addition, the exchange ratio was fixed (no real exchange premium) on this deal at 0.70 shares of Lorillard for each share of Loews, which at the time only represented a premium of 7.4% over the price of Loews common stock.
Nevertheless, I was still able to eke out a profit on this trade. I sold the 69 shares of Lorillard (LO) in my Special Situations Real Money Portfolio on August 15th. I received $5,002.42 net commissions for those shares plus $21.74 in cash for fractional shares. In addition, I also collected two $6.19 dividends while holding Loews (L). Therefore, the total amount of cash I received was $5,036.54. To keep the math simple, I assumed all the cash was received on August 15, 2008. I originally paid $4,827.26 for the 99 shares of Loews on January 4, 2008. Using my spreadsheet calculation, I see that I held the position for 225 days and netted a profit of $209.28. My total return was thus 4.3%, with the average annualized rate of return being 7%.
This was a less than impressive return for the Special Situations Real Money Portfolio, but given the mistakes I made, I am happy that I made anything on this transaction. I bought way too early, which exposed me to a lot of market risk. Also, since there was no conversion premium for this split-off (which I falsely guess there would be before the details were announced), there was really not enough return potential associated with this split-off to be worth the risk. Patience is critical for these special situations, even if you end up leaving some profit on the table now and then. Hopefully, I won’t jump the gun again in a future split-off.
In addition to these two split-offs, I also held the preferred E class shares of Thornburg Mortgage (TMA-E) for a few weeks based on discussions in the Contributor’s Corner Forum concerning the unusual tender offer for the ailing company’s preferred shares. I sold for a slight profit on July 11th. However, had I not gotten cold feet I would have made a nice return. The tender offer went through and now those shares I originally bought at $4.65 per share are trading at $6.25 per share.
Towards the end of August, I also bought 99 shares of Franklin Covey (FC) since they announced a tender offer. I bought the shares for $8.70 per share on August 18th and I should be receiving $9.25 per share shortly since the results of this tender offer have already been announced.
Finally, I also bought into another split-off that looks very promising. I’m not going to get into the details of this split-off yet, since it is still on going. However, the details are available to members of Contributor’s Corner (another good reason to join).
Year to date the Special Situations Real Money Portfolio is now up 8.81%, which is a dramatic turn around from the negative performance numbers I had been quoting for most of this year. That comes out to a 38.6% internal rate of return since the beginning of the year.
Since inception, the portfolio has gained 73.56%. The annualized internal rate of return since inception is back up to an impressive 23.74%. I still have a ways to go before being able to match Warren Buffett’s claim to be able to earn 50% annualized returns on a small portfolio, but I’m very happy to get my performance up to almost half of what Buffett could do. This portfolio is blowing away all the standard benchmarks right now.
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Disclosure: I own shares of Franklin Covey (FC) and Kraft (KFT). I no longer own shares of Loews (L), Lorillard (LO), TMA-E or Ralcorp Holdings (RAH). I also do not own shares of Thornburg Mortgage (TMA).
