The Month In Review: June
Kristian Dibble
June marked the last month of what really must be called a year of two halves. The 2008/09 financial year proved to be the worst in 27 years, but since March we have seen an impressive recovery and June continued that trend, with the S&P/ASX 200 up a further 3.6% for the month (versus an horrific -24% return for the year!!!). In June, The Rivkin Report continued to capitalise on equity raisings, high option prices and volatility to generate short term trades and position our portfolios in quality blue chip companies.
The most prominent feature of our June trading was the introduction of the $500 trade. I honestly didn’t think we would be recommending such trades at the beginning of the year; however, we were recently presented with two outstanding opportunities that stacked up incredibly well on a risk/reward basis.
The first such trade was Graincorp (GNC), which announced a capital raising allowing existing retail shareholders to apply for up to $15,000 worth of new shares at $6.25 each. The offer was quite unusual because the record date to be classified as an existing shareholder was after the announcement date, leaving us a small window to purchase shares to become eligible for the capital raising. At the time of the announcement, GNC was trading at $7.65, yielding a theoretical gross paper profit of $3,360, so we recommended members buy the minimum parcel of shares ($500 worth) required by the ASX to become shareholders. In effect, the trade was a call option on the capital raising, because if the GNC share price sank to below $6.25, we could simply walk away from the offer and sell the shares… and that’s precisely why we were so excited about the risk/reward scenario in this trade. The share price has held up very well, so we have recommended members apply for the full allocation of shares. There is, of course, a chance we could be scaled back, however this risk is really only an opportunity cost and not a risk of losing money.
Perfect timing!!!
Asciano Group (AIO) was the next $500 trade that we made on the somewhat unusual basis of expecting a capital raising. The company was effectively running an auction on its assets, and our view was that the renewed appetite for equities provided the company a get-out-of-jail-free card. Similar to GNC, the $500 trade provided a potential ‘call’ on a capital raising, and the extreme downside was $500 if AIO went belly up (a highly unlikely eventuality). AIO is the old, re-jigged Patrick Corporation that was spun out of Toll Holdings, which was then heavily sold down by the market on debt concerns. AIO holds prized rail and port assets and it was clear that the only real problem was debt. This trade proved fortuitous, because days after our recommendation, AIO announced a massive capital raising plan allowing retail shareholders to apply on a one-for-one basis and more importantly, the ability to apply for a (potentially) unlimited number of additional shares at $1.10. The share price is currently $1.31, leaving a substantial buffer, so for a $500 investment, we have the opportunity to apply for as many shares as we can afford (subject to a potential scale back) with an immediate paper profit at current prices of 19%. Clearly, we’re pretty excited about this trade for members!
A new approach…
Last year, I personally rang some previous members for feedback, and one of the consistent areas of comment was not being able to get set in some trades. This can certainly be an issue given the number of members we have, so we have made the long term decision for The Rivkin Report to slowly move away from less liquid stocks to make it easier for everyone to get in and out. It was on this basis (as well as a relative bullish view on big caps) that we recently exited Cash Converters International (CCV) and FSA Group (FSA). Small caps had been dealt with particularly harshly by the bear market and many quality small caps were trading on PE’s in the 3 to 4 range in March, which was ludicrous in our opinion. The rally of the last two months has balanced the books somewhat, with many small caps doubling in value, which provided us with an ideal ‘exit stage left’ for these trades. Overall, we lost on both of these trades, however we believed this was the right decision for members to make.
Lion Selection (LST) has been held with gritted teeth and we were relieved by its plans to demerge its non-gold assets into a newly listed company and merge its gold assets with Catalpa Resources (CAH), along with a 10c capital distribution. Not surprisingly, LST rallied from $1.02 to $1.38 and we took our exit on assessment of risk/reward. We lost 20% on this trade, which we are kicking ourselves about, however in the context of the greater bear market malaise of the last 18 months, the stock has well outperformed.
In last month’s review, we were mid flight in the RIO trade, which proved to be exceptional. RIO had been sold off far too heavily on concerns over the proposed deal with Chinalco, so we took the contrarian view and made the not too big assumption that RIO’s finances would be sorted out and once that happened, RIO would be re-rated. We bought RIO at $60.14 and sold it less than two weeks later at $69. As fate would have it, RIO and BHP not long after announced a proposal for an iron ore joint venture delivering massive savings to both companies, along with a massive rights issue and news of walking away from the Chinalco deal. The rights issue was a little unusual and convoluted, in that the rights were able to be sold on-market. We placed a new, longer term buy recommendation on RIO after digesting the new RIO that was on offer, so I expect members to make good money in the future on this one.
We also closed some short term, blue chip trades (AMP, ORG and TAH) because our stop losses were hit. Although the losses were small and we stuck to our game plan, we were nevertheless disappointed by losing money on these trades. Of late, the stock market has range traded and I have noticed that today’s momentum stock is often tomorrow’s flunk. There aren’t too many examples of a stock that has performed well and then continued to perform. My reading of the market is that traders are happy to take any profits at the moment, resulting in momentum rarely being sustained.
As expected, volatility has continued…
Whipsawing prices are the enemy of the momentum trader and friend of the options seller. Option prices are extreme at the moment, which has provided us with easy ways to make money. In June, all three of our covered call option trades came to expiry. Westfield Group (WDC) stayed below the exercise price of $12, so we simply let those options expire and we are now looking for some more options to write against this stock. Woodside Petroleum (WPL) traded above the exercise price of $40 toward the end of June, so we recommended members buy back these options and write new options expiring in August 2009, with an exercise price of $44.50. The approximate premium on these options was $1.38, or $1,380 per options contract. The remaining covered call option trade was Crown (CWN) and our recommendation was to exit the trade by either waiting to be called or selling these shares and buying back the options. This recommendation was consistent with our previous sell recommendation on CWN. WDC, WPL and CWN all produced very acceptable returns.
And finally, Australia and New Zealand Banking Group (ANZ) announced a capital raising priced at $14.40, allowing retail shareholders to apply for up to $15,000 worth of new shares. Given the share price was $17.30, it really was money lying on the street waiting to be picked up, so we most certainly recommended subscribers take up the offer!
Looking forward…
We have been actively seeking out arbitrage opportunities off the back of corporate actions, in what is otherwise a market with limited direction. Our strategy is to do more of the same should the opportunities present themselves. It’s important we keep selling out of any non-performing or risky positions and invest in the best candidates. We were exceptionally busy during June and it was great to see so many members taking up the capital raisings, positioning their portfolios and getting excited about the market. We certainly are, and we’re looking