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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
My blog:
Rangeley Capital on Harvest
My book:
Rangeley Capital Best Investment Ideas
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  • Chris DeMuth Jr's Favorite ETF For 2015
    • My favorite ETF is AdvisorShares TrimTabs Float Shrink ETF
    • It has more than doubled since its recent inception
    • Even after doubling, I still think it is an attractive long

    Ice is almost out on Rangeley Lake.

    With warmer weather ahead, my mind starts to wander to lazy ways to allocate capital without too much work. Thus, one of my few ETF ideas for your consideration.

    The goal of AdvisorShares TrimTabs Float Shrink ETF (TTFS) is to beat the Russell 3000 (NYSEARCA:IWV), which it has consistently succeeded at accomplishing since it launched. It also attempts to do so with less volatility than its index.

    This $222 million ETF is focused on companies with net share count reduction. One of the keys to its success has been in owning a large number of deal targets. According to Bloomberg, it has had fifty-seven exits via acquisition, which is over one per month. These takeover targets included Kraft (NASDAQ:KRFT). Bloomberg also notes that it contains several prospective takeover candidates including Starwood (NYSE:HOT), Zoetis (NYSE:ZTS), Scripps Network (NYSE:SNI), and Rockwell Automation (NYSE:ROK).

    So why do I care? I care because one of the major differences between getting paid as a shareholder and getting paid as a manager is whether or not one cares about value on a per share basis. My favorite management teams focus on value per share. Often, they reduce their shares outstanding over time in companies such as Loews Corporation (NYSE:L):

    I don't spend much time philosophizing over whether they are making me money because they are good managers or because they are large shareholders; in the case of the Tisches, I suspect that it is a large measure of both.

    Another of my investments with a share price that has been rising while its share count has been falling is Ocean Shore Holding (NASDAQ:OSHC). This small bank is a likely takeover candidate in the near future, but the takeover price per share will be improved by the management's constant buybacks while we await the bank's sale to a strategic buyer:

    Other companies have boards and managements that appear to be more in the business of selling shares instead of selling their nominal products and services:

    This is a value destruction machine, but it manages to stay in business by constantly selling ever more shares. The most extreme example that I have seen of this phenomenon is Axion Power International (OTCQB:AXPW), a company that is inexplicably a constant source of stock trader chatter on Seeking Alpha:

    It appears to be worth exactly $0.00, but it has a market capitalization of over $2 million, while it keeps finding buyers for its probably worthless shares. In percentage terms, its share price is down over 95% while its share count is up over 100,000%:

    While an actively managed ETF would generally have almost no appeal to me, the strategy of favoring companies with declining share count makes sense in theory and in my experience.

    May 01 11:01 PM | Link | 11 Comments
  • Quote Of The Day – Friday, May 01, 2015

    From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time.

    - Friedrich Hayek

    Continue the conversation at Sifting the World.

    May 01 10:25 AM | Link | 5 Comments
  • 23% Annualized Yield With Pepco

    Deal Target Description

    Pepco Holdings (NYSE:POM)is a utility holding company in the mid-Atlantic region engaged in the transmission, distribution, and supply of electricity as well as the distribution and supply of natural gas.

    Deal Terms

    The retirement of POM's longtime CEO lead to rampant deal speculation. Exelon Corporation (NYSE:EXC) was the most logical buyer. However, PPL (NYSE:PPL), FirstEnergy (NYSE:FE) Public Service Enterprise Group (NYSE:PEG), and American Electric Power (NYSE:AEP) were alternative bidders. By April 2014, it was well-known that POM was on the market. On April 30, 2014, EXC and POM announced a definitive agreement under which Pepco shareholders will receive $27.25 per share in cash.

    Deal Financing

    The deal is not conditioned upon financing. Morgan Stanley (NYSE:MS) represents the target and Goldman Sachs (NYSE:GS) represents the acquirer. The transaction is supported by a fully committed $7.2 billion bridge facility with Barclays (NYSE:BCS) and GS. EXC expects the permanent financing plan to include a combination of EXC equity issuance, long-term debt and corporate cash. The financing for the POM deal is largely coming from up to $1 billion of EXC divestitures of non-core assets. As of February 2015, EXC had divested assets worth about $1.8 billion on a pre-tax basis.

    Deal Conditions

    The transaction requires the approval of the stockholders of Pepco Holdings. Completion of the transaction is also conditioned upon approval by the:

    • Federal Energy Regulatory Commission/FERC
    • District of Columbia Public Service Commission/DC PSC
    • Delaware Public Service Commission/DE PSC
    • Maryland Public Service Commission/MD PSC and
    • New Jersey Board of Public Utilities/NJ BPU

    The transaction is also subject to the notification and reporting requirements under the Hart-Scott-Rodino Act/HSR and other customary closing conditions.

    As of Thursday, April 30, 2015, the merging companies have made progress towards the deal's completion. They filed their FERC application on May 30, 2014. FERC cleared the deal on November 14, 2014.

    On June 14, 2014, they filed their applications with public utility commissions/PUCs in Delaware, New Jersey, and Washington, DC. On August 14, 2015, they filed their PUC application in Maryland, which will probably be the gating item. On September 23, 2014, POM shareholders approved the deal. They secured their first regulatory approval on October 8, 2014 with the Virginia State Corporation Commission approval. On January 14, 2015, the companies reached a settlement with the New Jersey Board of Public Utilities staff. The commissioners approved it on February 11, 2015. In February, they reached a settlement with the Delaware staff. After settling with Delaware staff and securing New Jersey approval, the companies extended the same offers to DC.

    The Department of Justice/DOJ issued a second request for additional information on October 9, 2014. The DOJ probed the interconnection process in certain sub-regions. The DOJ also had concerns about the FERC approval. Ultimately the DOJ cleared the deal on December 22, 2014.

    As of March 2015, it was clear that the Maryland review would be the gating item. They enhanced their proposed package of merger benefits to help secure that approval. They also settled with the Alliance for Solar Choice, one of the interveners in the Maryland review. In another settlement, the companies came to terms with Montgomery and Prince George's counties. The Maryland Attorney General and the Maryland Office of People's Counsel opposes the deal. The Maryland PSC decision deadline is May 8, 2015.

    Deal Price

    The deal price is about a 25% premium to the previous market price for POM. There is currently a $1.53 net spread which is worth about a 23% annualized net return to a close around August 1, 2015.


    While this is currently a political zoo, the deal will probably be able to close sometime in the third quarter of this year. Relative to the deal risks and the downside if the deal breaks, POM offers an attractive 23% annualized return.

    Tags: POM, EXC, FE, AEP, GS, MS, BCS
    Apr 30 9:11 PM | Link | 12 Comments
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