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Sometimes it pays to acknowledge you’re not as smart as you think, and other year-end tales

December 29, 2017

I’m writing this from a place way up in the mountains where there is no internet connection. I find it healthy to disconnect sometimes, because it forces me to think and reflect, rather than ‘follow the market’.

So I’ve been reflecting on my successful trade in NACCO Industries (NC). Not that I want you to think I’m bragging, a close to 70% return in only a six weeks is nothing to sneeze at after all, but, really, I’m not. I just want to learn from this experience so I can replicate it… over and over. In large part, I have to say, the return was mostly pure chance. These things happen once in a while if you’re in the right place at the right time… Still, is there anything I can learn from it to better my next investment?

What were the factors leading to such a phenomenal (for me at least) return? Well, the first was that I ‘showed up’, I actually purchased shares in the spinoff before the event. I have the Clarke Street Value blog to thank for that. Second, I was quick to recognize that this spinoff had all the makings of a classic Joel Greenblatt (meaning, attractive) spinoff; the parent’s two businesses were in completely unrelated fields (Coal and small home kitchen equipment), it was somewhat complicated (family controlled, dual class share structure) and it was a small enough transaction to be under the radar of most institutional and hedge funds. So the first reminder to self is to identify all upcoming spinoffs. They generally lead to some good returns (again, thanks Joel Greenblatt). To do that you’ll need to read, read, read: the Wall Street Journal, Barrons, Bloomberg, whatever you can get your hands on, oh and of course Clarke Street Value blog.

So what were the other factors leading to success? 1) timing of the purchase (pure chance), 2) timing of the sale (again, you got it, PURE CHANCE) and finally acknowledging that I didn’t really know which of the eventual spinoff entities was going to outperform … so I held both. Maybe I was just too lazy to do the research. Maybe I figured I really didn’t know enough about either industry to make an educated guess about where each spinoff entity would trade. But let’s just say I was smart enough to acknowledge that I just didn’t know; the important thing was that post-spin investors were going to have the chance to value each business independently, coal investors were going to be evaluating NACCO, small kitchen appliance investors were going to be evaluating Hamilton Beach, independently of each other. Most likely investors would value the sum of the two independent businesses at more than the original combined entity. Furthermore, perhaps the spinoff was in preparation for the family to divest one of the two businesses, which would be an added kicker.

What actually happened was nothing that I could have predicted. The first day of post spinoff trading, 9/29, NC traded below $20 per share and HBB traded in the low $30s. Investors were dumping the coal mining shares in favor of the kitchen aid business. This is just what I thought would happen. I myself, favored HBB over NC (but with of course no research to back this up). Luckily I did nothing. By the end of Monday, the next trading day, however, NC was trading in the low $30s (and I was berating myself for not having bought NC below $20 for a quick 50% gain!). Still, I let sloth prevail and did nothing. Over the ensuing month both shares traded up to the low $40s. When the shares of NC finally overtook HBB in dollar terms and I had a 70% gain in 6 weeks I said, enough is enough and sold. How could two businesses be worth 70% more separate than together? Now, I could understand a gain like this after a couple of years of decent performance on the part of one or both companies. But really, after 6 weeks and no further information? It was just too much for my rational mind; I was out. It wasn’t a clean ‘out’ however; NC had distributed 1 share of HBB A stock and 1 share of HBB B stock for each share of NC owned at the spinoff date. The catch was that the B shares were not registered to be traded on any exchange and they had to be exchanged on a 1 for 1 basis for A shares. To further complicate the issue the B shares were not in book form so it was going to take 6 weeks to make the exchange (needless to say I’m still waiting). So to close out the trade I shorted an equal number of A shares to what I would receive in the exchange. And lucky I did! Since then HBB shares have declined over 30%. Had I not exited when I did I would now be up only some 40%. Not bad, but not the stellar 70% return I managed. So a further lesson; Don’t be too greedy!

OK a few housekeeping items. I sold off my position in (SPRT) last month, primarily because it was too small but at the same time I didn’t have enough confidence in the investment rationale to increase the position to my standard size. I also sold of my position in Gyrodyne (GYRO) for a tax loss I needed to balance out other LT gains. I haven’t soured completely on GYRO and may buy the position back in the new year.

One Comment
  1. The mountains sound like a lovely place to reflect LTV. That’s a heck of a return to get in 6 weeks and it is always interesting to watch spin-offs in action. I had one this year too, the part market value of the companies is far higher than the previous combined market value.

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