Blueberry Portfolio Month 4 – Whiterock Luck

September 16th, 2012 by Potato

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

In my last report I didn’t have much to say, and the market as a whole has been pretty boring since then too.

It’s been a touch more exciting in our investment portfolio the last two weeks. We now stand at over a 15% return since inception, vs. the TSX at just over 1%.

Generally, things are working out quite well (with of course a few exceptions). In particular, Whiterock REIT was climbing up above the $14 mark in the month, which raises the eternal debate with these kinds of stocks: should we take the quick capital gain, or continue to hold for the distribution?

There is always some measure of uncertainty when valuing a stock, and transaction fees are a drag, so the strategy in general is to buy when undervalued, and hold until you think the risk starts to outweigh the opportunity — ideally forever otherwise. But I thought that I had a pretty good handle on Whiterock: I was happy to buy lots of it at any price below $12, considered it fairly valued in the $12-14 range, and much above $14 it started to look a little pricey. That is, in my opinion, an extraordinarily narrow range for valuations, and I was perhaps being a little too precise. To put it in terms of expected future returns, the difference between the high and low points would be the difference in earning 9.3% or 8.0% — quite a narrow range indeed. Nonetheless, once the price hit $14 the “maybe it’s time to sell” gears started turning in my head.

Considering we had almost a 20% gain on it in just 4 months, I gave serious consideration to taking the quick capital gain, and ended up putting in an order to sell one night. Fortunately we got lucky, because rather than selling for $14.50 Dundee came along with a takeover offer that very morning, and we ended up getting $16.05 for the shares — a 10% extra gain just by pure dumb luck.

Once again though I find myself without many good ideas. The market has recovered a lot from the October lows, and isn’t presenting a lot of opportunities. Last time around I increased the position sizes of the ideas I did have, but I can’t keep pushing that strategy or we’ll end up with just 4 or 5 concentrated names, and I’m not comfortable with that. As it is, Chemtrade has continued to perform well, giving us another 6% return in the last 2 weeks. If this continues I *will* be trimming back: as much as I like the stock, as high as my “price target” or the upper range of my fair valuation estimate is, and as much as we’re “playing with the winnings” here, I simply don’t like the idea of having more than 20% of the portfolio in any one position. I have a large reading list ahead of me which may prove fruitful, but in the meantime we will deviate from the plan to remain nearly totally invested.

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