Catalyst-Driven Investing: Beating Mr. Market with KSP Shares

| About: K-Sea Transportation (KSP)

Markets react. The market’s spoils go to those who anticipate.

Seeking Alpha published my piece on K-Sea Transportation (NYSE:KSP) on January 3rd. I had observed insider purchases, a short term breakout, and unfounded “expert” fear of debt covenant issues in taking a long position in the shares. I critiqued analysts’ perceptions as well as alternate possible explanations for the short term breakout I had observed. I speculated on a catalyst. Portfolio managers who shared my perception may have in theory purchased at the $11.81 open on January 4th.

On Friday January 22nd, the catalyst I anticipated occurred. I promptly shared this follow-on observation with a link to the SEC filing in a comment to my article. On January 22nd, KSP shares closed at $13.81.

In reaction to the catalyst I anticipated, Wells Fargo upgraded KSP shares on Monday January 25th. I closed my position, and promptly updated my article explaining my decision:

Wells Fargo today upgraded KSP, on the back of the catalyst I anticipated. KSP may continue its recent ascent, or may not. My insight has served its purpose as I do not have a further reaching perspective on KSP. Thus, I today closed my position in K-Sea Transportation. I have alternate, higher conviction ideas of a long term nature and have already used proceeds to add to my position in AWP today. KSP went from about $11 (I had purchased at $11 and change on Dec 31) to nearly $15 (my comment preceeded the $15.36 peak on that day) in less than a month since I wrote my piece. I believe the primary utility of my contribution has run its course, and I felt appropriate to update here accordingly.

There were opportunities for those who shared my perceptions and my attitudes toward risk to sell above $15 on Monday, Tuesday, and Wednesday.

What I did was very simple. I identified a specific dynamic (debt covenants in this case). I successfully anticipated a catalyst – a change to that dynamic. I exited when the market priced in what I had anticipated.

I can not assess all the reasons a retail analyst upgrades or downgrades. Perhaps the analyst(s) at Wells Fargo who upgraded KSP Monday (at higher prices, where I sold) had justifiable reasons to do so. The same firm had published on KSP shares with an "Outperform/Buy" rating on dates from July 7, 2008 (price around $29) through October 22nd, 2009 (price around $23).

The message of this piece is not to criticize Wells Fargo research. Rather, this case demonstrates an example of Mr. Market’s spoils going to those who identify market dynamics before they happen and successfully anticipate changes to those dynamics.

I have no near-term plans to open a new position in KSP. Most of my proceeds from a successful investment in KSP are redeployed in a Closed-End Fund holding where I anticipate growing monthly dividends distributions serving as a catalyst to drive the fund from its current double-digit discount to a premium by Year End 2010. Only baby steps toward my anticipated catalyst have begun there. Interested followers may choose to read my January 14th article, which represents my highest conviction position.

I am not a financial advisor and anyone who finds my work worth contemplation should discuss ideas with a financial advisor before taking market action.

Addendum: At the time this is published, it will likely be clear to all readers that this case represented a highly profitable catalyst driven long position in a security whose broader fundamentals were very flawed. Future readers should be made aware that just three days after successfully closing this catalyst-driven long position, K-Sea Transportation’s broader fundamentals were shown to be more problematic than any analysts anticipated. On Thursday January 28th, KSP shares closed at 9.89.

Disclosure: Closed KSP long position on Jan 25th. No current or anticipated positions.