Portfolio Stocks

PINE STREET JOURNAL

Poor Richard's Financial Strategies
Home
Contact
About

Last updated 10th, December 2015

 
Updated views,  December 10th:
 
This weeks report of 9.6% drop in profits, brouht my holding deep into the red by ~28%.  Although I do expect a rocky ride in a small cap holding such as this with an unclear track record, such a drop is very meaninful and may bring into question the long term profitability of the companies business model.  No action taken as yet as I re-evaluate BNED.
 
Initial evaluation and purchase made on 10th , August 2015 for 2.55% of portfolio (initially plpanned 1%)
 
Barnes and Noble Education was spun off from Barnes & Nobel on July 27.  I often look for ideas in corporate spin-offs.  I plan on starting out slow on this one with only a 1% stake.  If all goes welI plan to continue purchasing 1% at a time for up to ~ 3% depending on how my evaluation progresses and the price of course.
 
I like spin-offs for a number of reasons.  Here are a few of them:
 
  • They are often completely viable companies that start out with an experienced mgt team from the parent company in a business that they are already familiar with and have existing profits, customer contracts etc.  What could be better. 
  • Point number one is a very motivational thing for the management team of the new company.
  • Then comes one of my favorites.  The new company, which is sometimes intimately familiar with the parent business begins to take on initiatives that might have been supressed under parent company and is often in a good position to compete directly with the parent.  In the same vein, if not directly competing with the parent, the spin-off is often in an advantageous cooperative position with the parent for new business if their businesses compliment each other.
  • For the first few weeks after a spinning off, investors of the original company who suddenly find the shares of a new and unfamiliar company in their portfolio, sell them bringing the share price down to a discount.  We'll call these folks group A.  This impact is usually seen for about a month, with the discount varying, based on how different the spin-off is from the core business of the parent company.  In the case of BNED I suspect the business is easily understood by the holders of BKS so I don't expect too deep of a discount but it has already fallen about 10 % so we'll see.
  • In the same manner as the previous bullet, people who found the shares in their portfolio and chose to hold on to them to see how they perform, but without much convition, will watch them drift quickly down due to group A and get discouraged, often because the reason for the drift down is not clear.  They then sell, bringing the price even further down.  It's like double coupon day in the stock market.  :)
  • And then one final thing I love about spin-offs.   The slow sell of group A and Group B usually plays out for about a month.  This gives goup C - Me in this case - a lot of time to evaluate the Spin-off and see if it is anything that I am interested in.
 
Because the sell of period vary's, when this scenario occurs, I often move into the stock a little at a time.  There's no way to know the bottom or when it will turn up.