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The price of a single share of Coastal Energy (LSE:CEO) took a leap of 147.50 pence from yesterday’s close of 1,210.00 to 1357.50. That healthy 12.19% increase was spawned largely on reports of a letter obtained by the Financial Post indicating that Indonesia’s state-owned oil company Pertamina has expressed interest in acquiring some or all of the assets of Coastal.
Once the market reacted wildly in early trading, Coastal, much to its credit, issued a terse statement reminding investors that, “The Company advises that it continuously evaluates strategic alternatives, including but not limited to the potential sale of the Company, to maximize shareholder value. However, there can be no assurance that any transaction will occur.”
The market was most likely responding the the 15% premium per share that Pertamina is said to be offering. Of course that was on yesterday’s closing price, so the premium that shareholders would pocket if they acquired the stock today would be slightly under 3% after high-end institutional investors took their pound of flesh, causing the stock to open at 1307.50 for investors on the street. Hence, Coastal’s announcement. If you are in, stay in. If you are not, then think twice . . . are you an investor or are you a speculator?
This is a perfect example of why we recommend a buy-and-hold strategy. If you have owned and held CEO for awhile, you have enjoyed a substantial return over the past 3-5 years and may see more to come. But don’t jump in today and expect to glean the same results, especially on the news that someone is interested in making an offering for the company.
Coastal’s public statement brings to mind a lesson in buying and selling that I was taught a long time ago when I was a partner in a management buyout. The day the papers were signed, our CEO said, “This company is now for sale.” What he meant was that our exit strategy, something that every company and every investor should have from the date of acquisition of the assets or the shares, was to sell the company and make a profit doing so. In the meantime, we would make a profit operating the company. The goal was neither operating the company nor selling the company. The goal was to make money. The same applies to an investor. The goal is not to own shares in the company, nor is it to sell shares in the company. The goal is to make money. It’s really just that simple.
As a buy-and-hold investor, you need to consider that you are more-or-less along for the ride and that you should be investing in companies whose management you trust to make money.
Coastal is saying, in effect, “Don’t get excited. We do this all the time. We look for opportunities to create wealth for our shareholders and stakeholders. That may be through exploration, production, acquisition, or proposition.”
Here is a tip about buying and selling that works for corporate acquisitions and sales or for private investors at the small shareholder level. The best time to sell something is when someone wants to buy it. The best time to buy something is when someone wants to sell it. Get this principle ingrained in your mind and you will always be the one with the leverage, which typically means that you will make more money.
Look at the stress that UK banking CEO’s are under. They are trying to sell off assets in order to comply with regulator demands. Everyone knows that they are under pressure, so the leverage goes to the buyer. The banks are not going to get what they could have gotten if they were not under pressure. On the other hand, in the Coastal situation, their announcement to shareholders this morning is an example of the seller’s leverage. It’s kind of like “Ho hum. Don’t get excited. We’re doing pretty well by ourselves, but if you want to make an offer, we’ll take a look at it and let you know what we think.” What they are really saying to a potential buyer is, “You want it? You’re going to have to pay for it.”
The bottom line is this: Use the same mindset when buying and selling stock. The dynamic works slightly differently, but it does have reasonable application.
