Well, I got this one completely and utterly wrong.
My reasons for buying DVN were a) big discount to NTA, b) improving/firming general property market, c) the first upgrade in years (the end of the profit downgrade cycle), c) the company putting itself up for sale (following major shareholder Leighton wanting to cash out) and d) plenty of good gossip that a firm bid would be made.
The company sales process has fallen over and the share price is now 75c. So that adds up to a decent loss and makes me a schmuck.
Two questions:
With hindsight, would I do the trade again? Probably. There were two decent catalysts being an earnings upgrade and the company putting itself up for sale. And plenty of value in the stock with a decent margin of safety - even taking the view the company would be sold for less than NTA.
Checkout the share price movements over the last year:
The price-action makes it pretty obvious the deal has been dead for some time and insiders have been well ahead of the market. What I would do differently is be attempting to reconcile why the share price kept sinking in the face of good news. These are tough situations to judge. As often as not, selling because of poor-price action can also be the wrong thing to do, however a stop-loss rule would have made the decision a lot easier.
The second question is what to do now. The fall-through of the sale process is the loss of a big catalyst, so to continue holding really requires some damn good reasoning.
DVN is cheap. NTA has actually pushed up a bit from $1.52 to $1.55 (31/12/14) so at 75c you get a whole bunch of property for half price. However: value alone is not a great reason to buy, and as noted in my last post (BOL) a value stock without a catalyst is a value trap. For example AV Jennings (AVJ) has been a long-term dog trading at a big discount to NTA for years. DVN's fundamentals have been improving, free cash flow has really pumped along over the last 12 months helping to get debt rapidly paid down and put a chunk of cash in the balance sheet, forecast profit looks pretty good (and is a good jump from current levels) so it's really quite eye opening to see the price where it is.
Anyway, I haven't made a decision as to what to do with DVN. The commitment I made to myself in starting this blog was not to sweep losses under the carpet - so I wanted to publicly discuss this trade. Please feel free to contact me if you have any views on DVN (or other stocks).
Two questions:
With hindsight, would I do the trade again? Probably. There were two decent catalysts being an earnings upgrade and the company putting itself up for sale. And plenty of value in the stock with a decent margin of safety - even taking the view the company would be sold for less than NTA.
Checkout the share price movements over the last year:
The price-action makes it pretty obvious the deal has been dead for some time and insiders have been well ahead of the market. What I would do differently is be attempting to reconcile why the share price kept sinking in the face of good news. These are tough situations to judge. As often as not, selling because of poor-price action can also be the wrong thing to do, however a stop-loss rule would have made the decision a lot easier.
The second question is what to do now. The fall-through of the sale process is the loss of a big catalyst, so to continue holding really requires some damn good reasoning.
DVN is cheap. NTA has actually pushed up a bit from $1.52 to $1.55 (31/12/14) so at 75c you get a whole bunch of property for half price. However: value alone is not a great reason to buy, and as noted in my last post (BOL) a value stock without a catalyst is a value trap. For example AV Jennings (AVJ) has been a long-term dog trading at a big discount to NTA for years. DVN's fundamentals have been improving, free cash flow has really pumped along over the last 12 months helping to get debt rapidly paid down and put a chunk of cash in the balance sheet, forecast profit looks pretty good (and is a good jump from current levels) so it's really quite eye opening to see the price where it is.
Anyway, I haven't made a decision as to what to do with DVN. The commitment I made to myself in starting this blog was not to sweep losses under the carpet - so I wanted to publicly discuss this trade. Please feel free to contact me if you have any views on DVN (or other stocks).
Kristian
Disclosure: own DVN
Keep up the great blog Kristian. I think your process was right...but you can't always control the outcome...
ReplyDeleteThanks Sterling - appreciated.
ReplyDelete