Sold My RTSX; Workout Timeline

February 11, 2008 by Joe Ponzio

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.)

The Results of The Workout

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.

Jumping From Workout To Workout – The Timeline

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.

Workouts Happen Fast, Occur Slowly

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!

A Note From Joe Ponzio

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