Blessed by the Potato

This is a monthly update from the Blueberry Portfolio. The events I talked about below happened approx 8 months ago.

Well, it’s been about a month since I started managing the Blueberry Investment Portfolio. In that time, the TSX has swung way down (12%), then most of the way back up, ending down just 2.5%.

The broker is reporting the portfolio as down just 0.3%, which I call a win, but given that the money was safely ensconced in a savings account before that, any loss can perhaps be viewed with derision.

This of course was not the case even just a few days ago. In the initial discussions of where to put the money, a planned core holding was going to be Berkshire Hathaway, the conglomerate controlled by Warren Buffett. Unfortunately I didn’t figure out how to buy US-listed securities in time, and some good news came out that drove the stock up over 10%. Though it may still be a good investment at 10% more, I didn’t feel like chasing it, and besides, buying in the US does add some complications.

Another missed opportunity was Armtec: once a darling stock in that magical “infrastructure” business that was supposed to get a boost from government stimulus spending, Armtec actually stumbled of late, and after suspending dividends started to trade like it was going out of business completely. I had just started to do my due diligence on it one Friday, planning to finish on the weekend. I didn’t get around to it that weekend, but figured I’d have plenty of time to finish over the next week. Unfortunately sometimes the market doesn’t give you the benefit of time, and by the middle of the week Armtec had jumped 120%. There’s no way to know if I would have felt comfortable buying it after doing my reading, but it still feels like a miss.

So we missed a few good opportunities.

We also had some rough luck with the stocks we did buy, finding Superior Plus melting away roughly 20% after buying it at what had already looked like bargain-basement prices. Even what I thought were solid names like Canexus and Futuremed were nearly as bad this month. The worst though was Daylight Energy, which dropped 32% over the course of the month.

However, our biggest loser turned into our biggest winner this week as a takeover offer for Daylight came through. Though we could have collected a few more percentage points by waiting until the closing date, I thought it might be prudent to sell into the market, and did just that last week, generating our first realized profit (and also bringing the portfolio almost back up to even).

And of course Daylight is an exemplary case to use in demonstrating that even when you get it all right in the market and end up making money, you certainly don’t get there by experiencing the market go straight up. We had to ride through some pretty gut-wrenching declines before we made it to today.

Speaking of take-overs, another large position in the portfolio is Capital Power Income Fund, which has received a take-over offer from Atlantic Power Corp. The deal is a little strange in that you have the option of either getting cash for your shares, or shares in the purchasing company, Atlantic Power. What’s really strange though is that about half the people will have to choose shares, or they’ll run out of cash. So odds are good that since the Capital Power shares were trading at a big discount to the take-over price, everyone will want cash. Thus, everyone is likely to end up with a mix of about half shares and half cash (though the default option is shares, so anyone who doesn’t bother to read their mail will get stuck with shares).

When we bought, Capital Power was trading as though you were just going to get shares, and at a discount to cash — but since we should get at least half as cash, we should do better than that. It works out to about a 2% return, which in just about 4 months is pretty decent (~6% annualized, with very little risk, and as much as 12% annualized if we get all cash). And that isn’t including the healthy dividend, either. Today, the Atlantic Power shares have traded lower, so even though Capital Power is still in the same place, it’s as though the discount has gone away (if we were proper arbitraguers, we would have shorted ATP).