I just finished going on a comment-spree and I thought I should update you on a few other things as well. First, I sold my RTSX today. When engaging in workouts (as with any other investment), I am looking for both safety of principal and a satisfactory return (thanks, Ben Graham, for the definition of an investment).
As you know, I may use leverage on my workout positions or as an offset if I need to buy a business and I am fully invested. The danger in using leverage is that you can quickly rack up the losses. Here's why I sold:
I had originally purchased blocks of RTSX when the deal was pending shareholder approval. I continued to purchase as the price was slipping on a lack of news. No insiders were selling. What was an attractive investment at $29 was mouth-watering at $27 and change. Price is a tool, not a guide.
The morning after shareholder approval was announced, the stock opened at $31.21. I wasn't going to give my shares away; then again, I didn't want greed to eat up my profits. I held for a few days, and ultimately decided that today was the day to sell — at $31.45. (If you watch the Level II quotes and saw a bunch of shares being dumped late in the day, that was probably us. No, you don't need to watch the Level II quotes.)
RTSX was a very nice deal, yielding a cash-on-cash return in excess of 20%. (Cash-on-cash return means net gain divided by net cash invested. It includes gains from leverage but excludes any investment from leverage which, upon closing, was immediately repaid.) It is nonsensical to turn that into an annualized yield because we can't expect to have workouts in our portfolio at all times, nor can we expect them to all turn out as well as RTSX, or Tribune before it. (Oh, but it is so much fun. Fine: about 856% annualized.)
Once again, I was comfortable giving up a few pennies — or in this case, one dollar — on the upside to protect my gains and prevent losses should the applecart be kicked over. Even if I weren't using leverage (as is the case for some), the 10.4% (or 6.6%) return from $28.50 (or $29.50) to $31.45 sure beat the heck out of keeping the cash in the money market for three weeks.
The speed with which we jumped from Tribune to RTSX seemed dizzying. Time flies when things are working. Lest you think workouts come up every time you open a web browser, let's review the timeline:
December 4, 2007:Tribune was discussed and ultimately acquired, a deal I had been watching since April of 2007.
December 20, 2007: Sold Tribune just prior to the closing.
January 21, 2007: Discussed RTSX, a position I began acquiring a few days earlier. (Sorry folks, no guaranteed real-time trades at F Wall Street).
February 11, 2008: Sold RTSX.
In short, we engaged in just two workouts in two and a half months. Though some mathematically minded readers will take this as one-workout-a-month, you should consider that these deals may be few and far between.
It took nearly a month to go from Tribune to RTSX. Then, once invested, the workout should not take too long to play out. The reasoning is simple: We look for virtually "done deals" that are offering substantial premiums. In the case of RTSX, we simply needed to wait for shareholder approval.
Before January 15, 2008, there was no definitive date for the shareholder meeting and no reason to invest without that meeting. Once the meeting was set for February 6, we had our "timeline" for our purchase and, based on the price over the ensuing weeks, we knew our expected profit as well. Buying prior to that would have been less workout and more speculation simply because the position would have lacked a definite timetable.
There are literally dozens, if not hundreds, of possible workout opportunities out there right now. The question is: Upon thorough analysis, do they offer safety of principal and a satisfactory return. To answer the first part, you must know the deal; to answer the last part, you must know the timeline.
Let's face it: Workouts can be extremely exciting and profitable. They can also be dangerous and frustrating, particularly when they fall apart or are hard to find. We have been fortunate (or I should say: I, as the author, have been fortunate) that the two deals discussed have proven to be profitable. Considering the gains on the two deals, I can stand to lose 20% or more on the next workout and still be ahead of the game by a few points.
What's the fastest way to ensure that we give those gains back? Sprint into the next workout with a dash of guru-itis. (It can happen to all of us.) Most people will assume that, because Tribune and RTSX made money, all workouts will make money. Folks, you will have your butt kicked from time to time. So will I. Take your time; analyze the deal thoroughly; accept nothing less than a satisfactory return and safety of principal; get back on the horse when you've been thrown off.
Of course, having said that, I'm going to spend the next two hours tonight looking for my next workout opportunity. I can't expect to find it tonight; then again, I won't find it if I don't start looking!
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Mon @ 12:45PM | View comment
g said,
good timing!
BreitBurn Energy: Playing the Commodities Crash
Sun @ 1:14AM | View comment
mike said,
ROIC is not based on earnings. it's just EBIT * (1-t) / invested capital. The flaw with ROIC...
What The Heck Is CROIC?
Thu @ 8:00AM | View comment
Cale Smith said,
New Ponzio Capital site looks great, Joe, and good to see you back posting!
BreitBurn Energy: Playing the Commodities Crash
Wed @ 5:50PM | View comment
kalidasa said,
in correction to an earlier post, it is Sham Gad(www.gadcapital.com) or www.shamgad.blogspot.com
Hedge Funds and the Early Buffett Partnership
Tue @ 3:29PM | View comment
Joe Ponzio said,
I think it got overheated. I still feel like it's a good long-term holding (if the buy price is right)....
Is Nutrisystem Healthy?
Tue @ 2:48PM | View comment
Nutrisystem Coupon said,
Dude, what happened to this stock? You would think in January this stock would be jumping through the roof...
Is Nutrisystem Healthy?
Nelson
Feb 12th, 2008
6 comments
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Mark
Feb 12th, 2008
17 comments
Thanks again for the geat info. In the post before I think you mention that you spent around 1 hour diggin through the proxy. From searching to investing what is a estimate of the average amount of time you spend on a workout? Would you recommend calling investor relations of the companies and asking some Q's about the deal to gather insight?
mark
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Adam
Feb 12th, 2008
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Adam S.
Feb 12th, 2008
Have you thought about offering a discussion forum where users can post a discuss possible workouts?
I really enjoy the site and think there is a great deal of potential here for posters to learn and bounce ideas off of each other.
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Joe Ponzio
Feb 12th, 2008
Joe on twitter
Ponzio Capital
Mark: It depends on the deal. The merger agreements are usually pretty standard so I can whip around them and understand the deal fairly quickly. In addition, I like to read the news from the deal announcement to the time of purchase to see if there are any problems or developments that have not been filed with the SEC. In general, I can dismiss a workout in as little as a few minutes or it may take two to three hours of research to determine I like the deal.
If I had to teach someone the "steps" of analyzing workouts, I would expect them to spend four or five hours initially picking apart a contender. As they learned, I would also expect that time requirement to drop.
Adam: Investor relations is usually swamped just before a deal specifically because everyone is calling, and usually with the same questions. Considering that most calls likely come from nervous, emotional investors that have not done a lot of research, I can certainly understand IR's frustration. Then again, that's their job so don't get off the phone until you are satisfied.
Keep in mind that in some stages of the deal, you might be better off speaking with the Proxy Solicitation Agent, listed in the proxy filed with the SEC. They don't get a ton of calls and are generally very friendly. I suspect it is because so few individual investors actually look at the SEC filings.
Adam S: I am kicking around the idea and have spoken to my web designer about it. I expect to post something about it this week. The major obstacle is preventing the noise and banter (and bashing) you find on other forums, but my designers have some suggestions on this.
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edward
Feb 13th, 2008
9 comments
Were do you look for workout situations?
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Dan
Feb 13th, 2008
36 comments
http://www.arbitrageview.com/riskarb.htm
http://www.mergerinvesting.com/pendingmergers
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Dan
Feb 13th, 2008
36 comments
Thoughts?
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edward
Feb 13th, 2008
9 comments
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Night
Feb 13th, 2008
72 comments
I think it'd be neat if there was a "Workout" forum wherein we'd have a topic "PENN". And to prevent it being spammed and useless, moderators would automatically delete contentless topics like:
Subject line:
"X and Z Merger??"
Content:
"do u guyz think x and z witll mermger??"
I think there should be a requirement to link any related sec filings & news articles. And to present an opinion.
Anyway,
PENN filed an 8K Current Report. There wasn't any update on anything related to the transaction. Carlino repeated his statement that the merger is set for Jun e 15, following the customary merger activities and final approval from all of the local regulators.
Section 5 <a href="http://www.sec.gov/Archives/edgar/data/921738/000110465908009847/a08-3742_3ex99d1.htm">8k Current Report</a>
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YA
Feb 13th, 2008
1 comment
Please add Feedblitz or a similar tool to your weblog so I can subscribe through email. Tx, Y.
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Dan
Feb 13th, 2008
36 comments
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Joe Ponzio
Feb 13th, 2008
Joe on twitter
Ponzio Capital
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Dan
Feb 15th, 2008
36 comments
What is my newbie mind overlooking?
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Night
Feb 15th, 2008
72 comments
"There are no remaining regulatory approvals needed to close the transaction. The Company anticipates closing on or before March 31, 2008."
Sweet.
I can't find enough about financing though.
Help please, hehe.
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Night
Feb 15th, 2008
72 comments
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Frozen Tundra
Feb 17th, 2008
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Jerry
Feb 19th, 2008
6 comments
1. I notice there is still quite a bit of volume (2/19/08). Are these day traders or is the aquiring company buying the stock as it becomes available?
2. What happens if you hold the stock through the acquisition date? How long does it take for the $ to get credited to the brokerage account?
Thanks.
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Joe Ponzio
Feb 19th, 2008
Joe on twitter
Ponzio Capital
If you hold through the closing, the payment is usually credited within 24-hours, but may settle T 3 like traditional stock trades.
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Dan
Feb 21st, 2008
36 comments
CCU - Clear Channel Comm: Another Done Deal
http://www.crossprofit.co...
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Night
Feb 21st, 2008
72 comments
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barry
Feb 21st, 2008
3 comments
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Sohbet
May 12th, 2008
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Your Name
Feb 9th, 2010