Friday, April 25, 2008

bought Husky with petro dollars

Today, in an uncharacteristic move, I sold all my shares of Petro Canada (PCA) for a profit and used the capital and proceeds to initiate a position in Husky Energy (HSE).

Why was this move uncharacteristic?
  • According to my investment philosophy I rarely sell stocks
  • I bought Husky near its 52 week high (I usually buy stocks that are well off of their highs due to valuation reasons)
  • I am buying an energy company while oil is trading north of $118/barrel, this probably represents some downside risk
  • I sold Petro Canada within 2 years of buying it; I fashion myself as a holder of stocks for the long term

So, why did I make the trade?

  • I purchased Petro Canada before I developed my current dividend growth strategy. Husky is a better fit for a dividend growth investor as they prioritize returning growing earnings as cash to shareholders.
  • Petro Canada has failed to execute, and has underperformed the entire universe of energy stocks by a wide margin for the entire time I've owned it. I even trimmed my position when the stock hit $60 in July of 2007 because I felt the company was overvalued, and in hindsight I turned out to be correct on that call, as today it trades around $50.
  • Husky's dividend growth record speaks for itself, and it currently yields 3.5%, whereas Petro Canada yields 1.1%.
  • Husky's regular and special dividends allow me to directly profit from high worldwide energy prices today, hedging me against my personal energy expenditures. This is not including the potential for captial gains long term. This may come in handy when gasoline reaches $2.25/liter in the year 2012.
  • Husky is well managed, and really emphasizes shareholder returns as their company aim.
  • Husky has higher returns on equity than Petro Canada does.
  • The only advantage that PCA holds over HSE that I can see is their stock is cheaper, I am tired of owning PCA for their valuation, besides I am not getting paid to wait.
  • I was in a profit position in Petro Canada anyway, so owning the laggard actually did yield modest gains in the end.
  • Buying Husky Energy (HSE) allows me to keep the same exposure in my portfolio that I had with Petro Canada (PCA). Husky, explores, refines, and markets just like PCA.

I'm sure now that I have sold out of Petro Canada the company will report fabulous earnings and the stock will shoot past $60/share. I'll find comfort in the fact that today I have increased my income from investments without having to add a dime of new money to my portfolio.


pitz said...

So you going to sell Walgreens and buy Shoppers Drug Mart based on identical logic (Shoppers = more expensive, but higher dividend, better stock price, and better growth in the short-term)?

MG said...

Absolutely not pitz, in fact as you know I am adding to WAG at these levels. If Shoppers keeps doing what they are doing for about 15 years, then I would place them on the same level as WAG. The risk/reward on WAG is attractive while Shoppers is still priced for near perfection. They're both good companies but Shoppers is too expensive, and they learned everything they know from WAG. I do like the SC dividend though, and as mentioned previously I would consider the stock on serious weakness.

Sarlock said...

I have been looking at the two companies over the past few days and HSE definitely seems the stronger of the two. And the P/E isn't that bad for an energy stock selling oil at $120 per barrel.

All that aside, I like the dividend yield. Very attractive for a passive growth portfolio.

pitz said...

Exactly! Thats why I find your logic concerning HSE/PCA to be a bit of a contradiction versus your position on WAG/SC.

Yes, it is your portfolio, and the decisions are yours alone to make, but I am trying to understand why you would apply one set of logic to your disposition of PCA in favour of HSE, but apply quite a different set of logic to your continued holding of WAG versus SC.

(disclosure to readers: i have lots of SC, but little WAG. the point of my post wasn't to shill for SC, but rather, to determine whether you are taking a quantitative approach to portfolio management, or a qualitative approach).

MG said...

pitz, as I said this was an uncharacteristic move for me, but I am still confident that I made the right decision. Differences:

1. SC only yields a small premium over WAG, while HSE yields a huge premium over PCA

2. WAG's dividend growth has been stellar, while PCA's has not.

3. My main reason4 for buying WAG, was not that it was cheap.

4. I actually made money on PCA, while I am in the red on WAG currently.

5. WAG continues to perform in rough conditions (same store sales) while PCA continues to underperform in great conditions.

Anonymous said...

I did exactly the same thing as you have done last year. I bought PCA at around $42.00 and waited and waited for it to go up and it did, then it went down and I waited longer. Finally I got out at $56.00, mainly because of the low dividend and put the funds elsewhere, to increase cash flow, its' all about cash flow.

Anonymous said...

Don't forget that PCA owns about 10 Billion barrels of recoverable oil sands 'dirt' which is not yet in the price of the stock. At todays prices, this is worth over a trillion dollars. The Fort Hills and McKay River projects will unlock this potential over the period 2012-2017.