Back in February I wrote this article about my decision to dump Linn Co. LLC (NASDAQ:LNCO). My decision was based on some of the ongoing reports of financial derivatives from its hedging gains in calculating cash flow. While the dividend yield and payouts were very attractive the company could be overpaying, and hence run into payout difficulties in the future.
As noted in this article, there were more questions being raised:
Linn doesn't deduct the cost of its financial derivatives from its hedging gains in calculating a key cash-flow measure. That suggests cash flow is overstated. That yield has attracted investors, but they could be overpaying. Linn's units trade for 10 times 2012 pretax cash flow, roughly double the valuation of energy exploration and production companies such as Apache (APA), Devon Energy (DVN), and Canada's Suncor Energy (SU), and in excess of valuations accorded smaller energy producers structured as MLPs. Moreover, Linn may be overstating the cash flow available for distribution, by not deducting the cost of financial derivatives-mainly put options-from its realized gains on hedging activities in its quarterly results.
Notwithstanding, most analysts have not paid much attention either, until recently (per my prior article):
David Amoss, an analyst at Howard Weil, broke ranks on Friday and downgraded Linn to Sector Perform from Outperform, citing the company's treatment of its hedging costs. Amoss cut his estimate of 2013 distributable cash flow to $2.45 per unit from $3.03, "to better reflect the underlying cost of the hedges" that he estimates at $120 million annually, he wrote in a client note. Linn might have to make accretive acquisitions this year to cover its $2.90 distribution, he added. Alternately, it is possible the distribution could be cut. Linn shares fell 3.8% on Friday, but still trade for two times book value.
Retirement Portfolios Should Try To Dodge Bullets
One of the hallmarks of a successful investor, whether it is a dividend income investor, or a growth investor, is the ability to move away from positions when there are serious questions and issues being raised.
Be "married" to a stock because it has a nice yield, or has grown in value, without watching for fundamental changes that could affect both areas of a portfolio's value, is a weakness that many folks find difficult to stick to. It is often said that it is far easier to buy a stock than to sell one, and this seems to have become a perfect case.
Yes, after I sold the stock from the Team Alpha Retirement Portfolio, I took plenty of heat and there was over 350 comments to the thread. As it turned out, the stock actually did shrug off the "bad" news, and continued higher. Since I am not a market timer, I missed out on another 10-11% increase in value and one dividend payment.
That being said, we now have learned that there is a non public and private, informal investigation by the SEC (read the entire Seeking Alpha transcript here).
in short, the article states the following:
LINN Energy, LLC (LINE) (LINN) and LinnCo, LLC ("LinnCo") announced that they have been notified by the staff of the Securities and Exchange Commission ("SEC") that its Fort Worth Regional Office has commenced a private, non-public inquiry regarding LINN and LinnCo. The SEC ((SCUR)) has requested the preservation of documents and communications that are potentially relevant to, among other things, LinnCo's proposed merger with Berry Petroleum Company, and LINN and LinnCo's use of non-GAAP financial measures and hedging strategy.
While there is nothing to assume that there is anything negative about LINN Energy, or LNCO, and that the company is working closely with the SEC in these issues, the fact remains that the shares of LNCO are down nearly 10% in the pre-market.
While we might have sold out a bit early, it appears that being right, has taken time, and selling our position was prudent for our retirement portfolio, and retired investors alike.
If we as investors can dodge a bullet, then why stand blindfolded in front of a firing squad. With our portfolio there are plenty of stocks that face less drama and can replace the income received from LNCO.
What If We Did Not Sell LNCO In February?
Well, the price of LNCO back when I wrote the original piece stood at just about $37.20 share. Today, the stock sits at $37.07/share and is likely to open well under $37.00/share.
Aside from missing one dividend, we are back where we were, but with more news to chew on. As far as I am concerned, the prudent move for investors is to avoid LNCO for the time being as the latest information does not appear to bode well for the share price, OR the dividends being paid.
At some point we can always jump back in when we get the all clear signal, but for now we have an "all muddy" signal. That is not a healthy position for a retirement portfolio core holding to be in.
The Bottom Line
Avoid LNCO until the dust settles. We just might be able to get LNCO at a bargain price if all is well! Until then, let's dodge this bullet.