Blessed by the Potato

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

The market has been much stronger in the last month, and we’re now up just over 6% from the beginning, vs. the market up 2.5% (in the last report, the market was down 2.5%, so both us and the market are up about 5% in the month).

Though my goal is to be almost fully invested most of the time, at the moment we have about 15% cash in the portfolio: I just don’t have any great high-conviction ideas at the moment. I’m researching some options, but haven’t had much time to put towards that. One problem is fear: we own a bit of Indigo Books & Music, which is one of the few stocks that’s down a lot since we bought it, and though it looks even cheaper now, I’m afraid to put any more capital towards it in case I’m wrong about the book and knick-knack selling business in Canada. It has really clean financials, and due to the decline in the stock price the modest dividend is now on its own an attractive feature: it’s yielding about 7% at these prices. However, they lost money in the last quarter, and the big gamble is what happens over the next few months. Will Canadians buy books, music, upscale wrapping paper, and whatever else Heather Reismann wants to sell in Chapters stores over the holidays, or has Amazon finally caught up and killed Canadian bookstores, after feasting on the carcasses of the American chains?

That’s really the key question. Indigo at the moment is trading for just a bit more than the value of their current inventory and the shelving units in the stores: if the company is at all profitable for the next couple of years, then this is a stupidly low price for it and we could make a lot of money by buying now. Historically, most of their money is made over the holiday season. If they can come out in the black again this year, then the stock will probably go up on the news. But if their losses continue into the new year, then we may be looking at store closings and the end of an era for physical books.

At the moment I view Indigo as a potential high-risk, high-reward stock. Even just getting back to where we bought it a few months ago would be a huge percentage return. So while I do seek out and invest in high-risk, high-reward situations, I try to keep the size small so that if we see the high-risk side rear its head and lose money (as we already have to a large extent on Indigo) it doesn’t hurt us too much (indeed, the returns in the first paragraph include losing money on Indigo — not all of our ideas will be winners).

As to the cash, well that’s there in large part because we’ve had a few take-overs.

One of my big ideas at the beginning was Capital Power income fund: it was in the process of being taken over by Atlantic Power. Both were power utilities paying nice, stable dividends. I was happy to own either for the long term, but an interesting opportunity was in buying Capital Power just for the takeover: we bought at $18.60 per share, and Atlantic Power was promising to buy those shares from us at $19.40 in just a few months. It seemed like a very low-risk opportunity, and so it was immediately one of the biggest positions at over 10% of the portfolio. In the end, I made a small mistake in evaluating the deal: Atlantic Power was offering a combination of shares and cash, and I thought we would be able to choose just cash and get just cash, but Atlantic Power wanted the whole deal (across every shareholder) to average out to half cash and half shares. If I was being a proper arbitrageur, I would have shorted the Atlantic Power shares at the same time I bought the Capital Power ones (short about half of one ATP for each CPA). In the end, we ended up getting the equivalent of $18.98 per Capital Power share, plus one tax-effective dividend payment of $0.145. That’s a gain of 2.8% in two months, which is fantastic (some investments don’t make that in a whole year). Still, a bit less than I had figured we’d make in my mistaken initial all-cash estimate.

Anyway, one of our biggest positions has been turned from a stock back into cash, which explains why we once again have a fair bit of cash to invest in something else.

At the moment, I don’t know what to invest it in. I’ll be doing research from my end, but remember Peter Lynch’s advice: good stocks don’t come out of nowhere, many are the companies you interact with every day as a consumer. So if you see the beginnings of a new fad (like crocs or lululemons), or ongoing good value and customer support, something that you find your friends and family talking about and recommending to each other consistently, make a mental note of it and let me know.

And especially make note of how busy your local Indigo/Chapters is this holiday season, and how that compares to previous years.