On Friday, February 6, Puget Power (PSD) announced the closing of the sale of its core business at $30 per share. Regular readers of my blog will recall that I recommended a purchase of PSD in November of last year at $18. If one includes the $.25 dividend payment from Jan 16, and the pro rata dividend of $.04, this transaction returns $30.29, or a profit of an impressive 68%.
While I am very happy to have a 68% win on a 3 month investment (and hope several of you are also counting your fortunes this weekend), I think this is a good time to turn around and look at the trade again to see if it was a wise trade or a bit of wisdom and a bit of luck.
Prior to the trade I listed off my thoughts here. In reviewing them I have the following thoughts:
- Insider confidence was high so I am glad to see that this metric proved accurate. Regular readers know that I spend a fair bit of time looking at insider buying to find the next potential company to purchase stock in.
- The dividend was appealing. Even if the deal failed I think it is highly likely the dividend would continue to be paid.
- Puget Power failed to meet the majority of my criteria for a normal purchase; I think it was a mistake to have discredited this so quickly in my earlier assessment. As I will note in a coming post, when we stop following the rules of our own systems we are well on the road to disaster.
- I think my assessment of $20 intrinsic value may have been a bit rushed. In assessing comparable companies, it is reasonable to conclude that if the deal had not gone through, the stock would have plummeted to somewhere in the area of $13. Its intrinsic value is higher but the reality of the situation is that the company had restructured itself for the merger and if the merger had failed to go through the company would likely have needed to restructure again - something the market would have surely punished it for.
Post Trade Activity:
- I had no sense of when the deal would close. All I had was speculation from other investors like myself and the few clippings that made the newspapers and investment papers.
- This last point leads into my next point. I had no real connection with the facts of the case, I did not go to any of the meetings in Washington to understand the situation. I simply read and researched from a distance. In short I did not do my due diligence to stay connected to the facts.
- There were a number of good exit points, a number of times shortly after the purchase that the stock touched $25. There is an old expression in investing, "leave a dollar on the counter for the other guy." What it basically translates to is when you make a big win don't chase the pennies if it means you are risking the dollars.
- After the announcement of the final merger date we can see in the volume that a number of investors sold off the stock. I am glad to see that in the final week and a bit I did not make the same mistake; once the risk is removed there is really no reason not to ride the trip out and collect.
I think greed may have played too much of a role in my initial selection criteria. Puget Power had a reasonable dividend but on the other criteria on which I normally base decisions, it falls short of the mark. I realized this shortly after the purchase in November and should have taken the early exit points and been happy with the substantial return I would have received.
The basis of Graham style value investing is all about reducing your risk of loss to 0%. By skipping several of the criteria, being distant from the story itself, and not selling when I had the opportunity- I let greed play too much of a role. Don't get me wrong I am happy with the profit from the trade, but there is always something to learn even when you win.