For most of 2007 I held large cap financials in my small trading account. I felt good about my decision to hold Manulife (MFC) and Power Financial (PWF), two of Canada’s premier financial services companies.
During 2007 I watched, from the sidelines, a few corporate takeovers. I learned that the initial offer per share often involved a premium of 20-30% above the previous day’s close. Additionally, I noted that there was often a run up in the share price after the initial offer as the market inevitably anticipated increased offers to come. The Board of the target company would declare the offered takeover price totally inadequate. The aggressor would respond with a revised full and final offer, usually somewhat higher than the initial offer but not even close to the ultimate full and final offer. Just as often, a third company would enter the fray and initiate a bidding war.
An example of the takeover process in 2007 involved Alcan (AL), eventually won by Rio Tinto (RTP:NY), who beat out Alcoa (AA:NY). Closer to home, right here in the west, was the takeover of Agricore United (AU) by Sask Pool (SWP) after out bidding Richardson. In both cases there was a considerable run up in the share price of the target company before the deal was done. My sense was that takeovers are good...if you happen to hold shares of the target company.
In the summer of 2007 I obviously had too much time on my hands, evidenced by the fact that I was watching a lot of BNN, Canada’s business news television channel.
It seemed that every week or so a guest analyst would heap praise upon HudBay Minerals (HBM). The reasons were as varied as the number of analysts. HudBay, I came to understand, had a wonderful balance sheet with nearly half a billion dollars of unencumbered capital and was spinning off nearly a million dollars of free cash flow each day! The price of zinc, HudBay’s principal product, had reached an all time high a few months earlier and was expected to rise again. Could it get any better than that? Almost to a man, the analysts picked HudBay Minerals as one of their top three picks and more often than not, HudBay was number one.
Finally, one day the analyst du jour declared HudBay to be the number one takeover target in North America if not the world! Well, didn’t that push me over the edge! With my newly acquired insight into the world of corporate takeovers I couldn’t wait to get my feet wet and my hands on some HudBay shares. I dove right in.
As a result, I pretty much liquidated my trading account. I sold off Manulife and Power Financial. On July 11, 2007 I bought HudBay at $27.35. Now, all there was left was to wait for the inevitable takeover offer and subsequent run up. NOT!
At that time, the price of zinc had popped to very near its all time high. Shortly thereafter the whole commodity sell off began. It has yet to come back. At about the same time HudBay was in the news because its Flin Flon smelter was revealed to be contaminating the entire town and surrounding area. Not good for share prices.
These two factors, the drop in the price of zinc and news stories about contamination, combined to kill the HudBay share price. In 2007, I knew nothing of stop losses. I wish that I had taken the time to learn.
I road my $27.35 shares down to $15.69 before bailing on January 18, 2008. For me, a huge loss! The HudBay share price eventually bottomed at $2.90 last December. They have since recovered to about $8.00 as of today.
The worst thing about my HudBay experience was that I was so excited the day of my purchase, I dashed off an email to family and friends recommending that they get on board. As far as I know, no one took my advice as they are, as a group, more passive than I. I believe that most of them hold only mutual funds and do not even have a trading account. For this I am thankful. Never again will I recommend a stock to family or friends.
During 2007 I watched, from the sidelines, a few corporate takeovers. I learned that the initial offer per share often involved a premium of 20-30% above the previous day’s close. Additionally, I noted that there was often a run up in the share price after the initial offer as the market inevitably anticipated increased offers to come. The Board of the target company would declare the offered takeover price totally inadequate. The aggressor would respond with a revised full and final offer, usually somewhat higher than the initial offer but not even close to the ultimate full and final offer. Just as often, a third company would enter the fray and initiate a bidding war.
An example of the takeover process in 2007 involved Alcan (AL), eventually won by Rio Tinto (RTP:NY), who beat out Alcoa (AA:NY). Closer to home, right here in the west, was the takeover of Agricore United (AU) by Sask Pool (SWP) after out bidding Richardson. In both cases there was a considerable run up in the share price of the target company before the deal was done. My sense was that takeovers are good...if you happen to hold shares of the target company.
In the summer of 2007 I obviously had too much time on my hands, evidenced by the fact that I was watching a lot of BNN, Canada’s business news television channel.
It seemed that every week or so a guest analyst would heap praise upon HudBay Minerals (HBM). The reasons were as varied as the number of analysts. HudBay, I came to understand, had a wonderful balance sheet with nearly half a billion dollars of unencumbered capital and was spinning off nearly a million dollars of free cash flow each day! The price of zinc, HudBay’s principal product, had reached an all time high a few months earlier and was expected to rise again. Could it get any better than that? Almost to a man, the analysts picked HudBay Minerals as one of their top three picks and more often than not, HudBay was number one.
Finally, one day the analyst du jour declared HudBay to be the number one takeover target in North America if not the world! Well, didn’t that push me over the edge! With my newly acquired insight into the world of corporate takeovers I couldn’t wait to get my feet wet and my hands on some HudBay shares. I dove right in.
As a result, I pretty much liquidated my trading account. I sold off Manulife and Power Financial. On July 11, 2007 I bought HudBay at $27.35. Now, all there was left was to wait for the inevitable takeover offer and subsequent run up. NOT!
At that time, the price of zinc had popped to very near its all time high. Shortly thereafter the whole commodity sell off began. It has yet to come back. At about the same time HudBay was in the news because its Flin Flon smelter was revealed to be contaminating the entire town and surrounding area. Not good for share prices.
These two factors, the drop in the price of zinc and news stories about contamination, combined to kill the HudBay share price. In 2007, I knew nothing of stop losses. I wish that I had taken the time to learn.
I road my $27.35 shares down to $15.69 before bailing on January 18, 2008. For me, a huge loss! The HudBay share price eventually bottomed at $2.90 last December. They have since recovered to about $8.00 as of today.
The worst thing about my HudBay experience was that I was so excited the day of my purchase, I dashed off an email to family and friends recommending that they get on board. As far as I know, no one took my advice as they are, as a group, more passive than I. I believe that most of them hold only mutual funds and do not even have a trading account. For this I am thankful. Never again will I recommend a stock to family or friends.
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