Pinetree Releases Results – Now What?

by JDH on March 21, 2007

My last specific commentary on PNP.TO – Pinetree Capital Corp. was published on March 17; at that time I said that there was lots of discussion over on the Buy High Sell Higher Forum, with comments ranging from the positive (just look at the increases in the stock price over the last year or two) to the negative (Pinetree has a Net Asset Value of less than $10, so rather than paying $22 per share, you would be better off buying shares in the companies they own).

The discussion continues with Pinetree’s March 21 release of it’s year end results. Interestingly the press release doesn’t contain their full results (no balance sheet or income statement), and as I write this at 9:00 pm on Wednesday night there is nothing yet on SEDAR (as pointed out by adriandunn over on the Forum) or on Pinetree’s web site (the press release is there, but not the full results).

The results confirm what we have been discussing for the last two weeks: if Pinetree were to liquidate all of it’s investments as of December 31, 2006, it would have a Net Asset Value of $8.47 per share. Since Pinetree closed Wednesday at $21.38, that means Pinetree is trading at a significant premium over NAV.

The press release boasts that “Net Income Grows by 254% to $183.1 Million” and “Earnings Per Share Increases by 150.2% to $4.63 (Basic) Per Share” which sounds really impressive. However, income traditionally means the money you earned by selling a product or service. Pinetree doesn’t sell anything; to them, income is simply the increase in their investments.

What does this mean?

First, I don’t think we can get hung up on traditional accounting definitions. If I buy a stock for $10 and two weeks later I sell it for $15, I made $5. Whether you call it income or profit or capital gains it doesn’t really matter; I made money, so I’m happy. (Yes, I realize the tax treatment of capital gains is different than dividend or employment income, but let’s ignore taxes for this part of the discussion).

Of course, it’s not a profit until you sell, so Pinetree’s $183.1 million profit is un-realized (I assume); it’s only when you sell that you can really “count your chickens”.

Second, if Pinetree’s investments continue to increase at the rate of 213.6% per year, as they did in 2006, the stock price will have a similar rate of appreciation. (The stock price was up by around 525% during that same period; you’ve got to love leverage).

However, at what point does the bubble burst? There are some warning signs on the horizon.

First, the chart, which is what I care about the most, is looking inconclusive. Here’s the chart since October:

Pinetree Capital Corp.

As you can see, Pinetree has made three new highs since November (noted as 1, 2 and 3). A series of higher highs is good news. It took 51 days to get from #1 to #2, and then 59 days to get from #2 to #3. Assuming an average of 55 days, the next high should be made on April 22, and it will be $26.25, since the average gain the other two times from high to high was 12.2%. (Hopefully no-one reading this blog is naive enough to believe that any stock trades in patterns as predictable as that, so no, before you ask, I am not predicting a price of $26.25 on April 22).

Also on the chart (the red arrow) is the December 4 volume of 2.83 million shares (which if my memory serves me correctly is about the time the Ontario Securities Commission announced an insider trading investigation of Pinetree’s chairman, and a famous newsletter writer told his readers to “back up the truck” and buy Pinetree because it had dropped too far). The next biggest volume day was March 16 (1.1 million shares) when index traders started buying so that their portfolios would match the TSX/S&P index prior to Pinetree’s inclusion the following Monday. Otherwise, volume has not been very high.

My worry with the chart is that I don’t see any nice recent up trend lines. The slope of the line since February is certainly lower than it was in 2006.

I also worry that the chairman is under investigation by the OSC, they release financial results buy don’t include the full financial results in the release or on their web site, they are trading at around 2.5 times NAV, and it is possible that the stock price is being significantly supported by the readers of one newsletter. All of that makes me squeamish.

Is it time to start lightening up on Pinetree? As of yesterday Pinetree was about 9% of my portfolio, and I’m starting to think that may be a little rich. I suspect that the big gains this year will be in the junior players, as they start producing, increase their reserves, or get bought out. Perhaps the idea of investing directly in Pinetree’s holdings has merit.

I have not yet drawn any conclusions, so please help me out by posting your thoughts here, or on the Buy High Sell Higher Forum. Right now I’m leaning towards lightening up, perhaps bringing Pinetree down to closer to 5% of the portfolio. Perhaps move more money into gold and other metals? Thoughts, anyone?  To make it easier to tabulate our thoughts, I have added a poll to the Forum; you can cast your vote here.

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adriandunn March 22, 2007 at 10:45 am

The stock is doing quite well today, recovering a some of its underperformance over the past week. However, the stock is still flat since it was added to the S&P / TSX Composite on Friday March 16th, while you’d be be up about 4% if you had moved into EDV.TO:

Yahoo Finance

Endeavour is essentially the same type of vehicle as Pinetree, a closed-end fund trading on the TSX investing in the resource sector, although their exposure to uranium only makes up 20% of their portfolio (versus 34% for Pinetree). The big difference is that it trades at a nice 20% discount to portfolio value, versus the huge 150% premium that Pinetree trades at (fullly diluted NAV is under $8 / share). This can only be good, both for if & when the fund closes down and liquidates their investments, or from the viewpoint of being an aquisition target. So my suggestion would be to move at least some of your profits from PNP into EDV, assuming you want to maintain your exposure to the same sectors as PNP.

The market seems to be disregarding PNP’s NAV today, but I believe that over time it will head back towards that number, especially if their NAV / share is flat (or even falling) quarter over quarter. Personally I am staying short PNP until I have a convincing reason to cover.

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