Wednesday, July 10, 2013

Commercially Trusting in PMC's Assets

PMC Commercial Trust was first brought up on this site in 2010, and then again in 2012. The company routinely traded at a discount of 30%+ to its net asset value, giving deep value investors the opportunity to buy a company that paid a high single-digit yield, and to do so while protecting one's principal.

Two days ago, these investors were rewarded, as the company agreed to a merger agreement that resulted in a one-day share price increase of 15%. PMC now trades almost 40% higher (including dividends) than it did when it was first mentioned on the site.

Non-value investors might pooh-pooh such returns; after all, a lot of stocks have returned far more than 40% over this period, so what makes this one even remotely impressive? The difference has to do with risk; very little had to go right in order for this return to be realized.

The company traded at a discount to its loan portfolio, which was secured at reasonable loan-to-value rates against earning real estate. Even though management did a rather poor job allocating capital over the last few years, the investment still turned out well. If the market had fallen rather than risen over the last few months, one's principal would likely have remained safe. Can this be said about other stocks that have risen over this period?

Protect your principal first, and your portfolio is likely to do well. As Warren Buffett is fond of saying, "You only have to do a very few things long as you don’t do too many things wrong."

Disclosure: No position

1 comment:

Anonymous said...

I became aware of the stock after you first brought it up here, and just sold to a nice profit. Thanks, Saj!