May 9, 2013 Comments

As most will have heard, Canadian Tire came out with decent earnings today but more importantly announced plans to spin off the real estate into a REIT which they would continue to own 80 to 90% of. But the existence of the REIT would make the value of the real estate more obvious. Canadian Tire shares ended the day up 11.2% on the news at $82.36. The stock opened at $86.50. I sold what worked out to 15% of my shares at the open based on an order I placed just before the open. I only heard the news a few minutes before the open. I might have sold closer to 20% but actually did not know off hand how many shares I owned across several accounts and was in a rush.

Selling some at $86.50 looks good right now, and may look even better tomorrow if the stock slips lower. Or perhaps before long I will regret selling at that price.

The actual REIT IPO will not take place until the Fall and so there is a lot of time for the market to digest the news and to worry about other things. So I don’t necessarily think the stock will rise over the summer. But really nobody knows and it depends on many things. The best that we can hope is to understand that the stock is probably still selling below a reasonable value and for that reason (and not for short term gains) I am comfortable holding it.

I have to wonder who were the buyers today especially at the open. It actually reached a high of $87.45 just after the open. Ya gotta feel like a chump if you bought near the open today and you end up losing money on this company today when 99.99% of its owners were making money on the stock today.

I had been advocating for Canadian Tire to do something like this. Still, in many ways the whole thing is strange. They plan to retain 80 to 90% of the REIT. But the 10 to 20% that trades is expected to fix a value on the real estate that is far higher than the common shareholders of Canadian Tire were apparently fixing on it until now. But the existence of the 10 to 20% that trades will effectively cause the common shareholders to now fix a higher value on the real estate as they can see its market value transparently due to the REIT. In the limit if they retained 99% of the REIT, you have a situation where basically NOTHING has changed in substance and yet the company jumps in value. It is financial engineering. In a pure efficient market this sort of thing would not increase the share price. But markets are not 100% pure and efficient. Thank goodness since if they were 100% efficient it would not be possible to find under-valued companies except by random luck).

In other news Melcor came out with earnings after the close. The earnings were good and they announced a 50 cents special dividend. I suspect that with push Melcor up tomorrow but we shall see.

 

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