Chesapeake Energy Cumulative Convertible Preferred

Chesapeake Energy Cumulative Convertible Preferred (CHK-PD) offer an appealing risk reward profile. 

Chesapeake Energy Cumulative Convertible Preferred

  • Symbol: CHK-PD
  • Principal Amount: $100
  • Coupon Rate: 4.5%
  • Convertible: 2.2727 – $43.9998
  • Call Date: 9/15/2010
  • Mature Date: No mature date
  • Distribution Dates: Quarterly (Suspended)
  • Current Price: $24.30

Chesapeake has been hit by the low oil and natural gas prices. However, there are some positives that gives a reasonable chance that the company will survive:

  • Commodity prices have gone up. Oil prices are hovering around $50. David Einhorn has made a bet on recovering natural gas prices.  
  • The company has been exchanging debt for equity. Although this is not great for equity investors, this is really good news for bond and preferred holders. More of these announcements will be a boon to both bond and preferred prices. 
  • The company has been divesting assets to pay down debt.
  • Amended its $4.0 billion credit facility

If Chesapeake survives and eventually starts paying dividend, this preferred could start approaching $100. Also, the dividend are cumulative – which means that it will accumulate while the dividends are suspended. To me, there is a greater than 50% chance that Chesapeake survives. So, it is a good gamble to take on this. I would treat it as a long term option investment.

Here is details on the preferred. 

Disclosure: I am long CHK-PD


Remember Commonwealth

Last October, I wrote an article on Commonwealth being significantly undervalued and advised investors to buy options on the shares. Apparently, Corvex felt same way about Commonwealth being undervalued and took almost a 10% stake in the company. 

I sold my options a while back at 100% profit, but if I had held them today they would be worth 16 times what I paid for. Oh Well :-). But congratulations to any shareholders that are still holding the shares!


Year end review

Happy new year! I took some time to disconnect over the last two weeks and enjoy the holidays. For the first post of 2013, I thought it might be a good to review all the picks from the last 3 months to see how I fared.


AIG is still one of my top picks. It is up about only $2 from the price I paid for the stock. However, I feel it still has significant upside. Mainly all the arguments I made previously still apply:

  • It trades at half of book value.
  • The government completely sold AIG shares at the end of 2012. It now only holds warrants in the company.
  • AIG sold its stake in AIA. It also has agreed to sell a majority of its stake in ILFC.
  • The company can now focus on its core insurance operations and improve its return on assets.

Dean Foods (DF)

I sold Dean at a little bit of a loss. I still think Fresh Diary Direct segment is undervalued. However, the volatility of Whitewave was too much for me to take. I think the best way to play Dean is to wait for them to distribute the Whitewave shares and buy it before the distribution date if the current prices remain as they are.

General Motors (GM)

GM is one of my biggest winners. It is up nearly 50% for me. The government sold off 200 million shares of its stake in the company to GM recently. This should have a positive impact on EPS. If the economy improves in US and Europe and vehicle sales return to a normalized state, earnings could easily be over $5 over the coming years. Also, it is slowly removing the overhang of the pension liabilities. This could also be a big boon.

With the stock to almost $30, I might cut my position in half and book some profit. The auto industry is very capital-intensive and very competitive.

Orchard Supply Hardware (OSH) & Sears Hometown & Outlet (SHOS)

I have written a lot about these two Sears spin offs and I am short both. As I mentioned in my previous articles, I am convinced Orchard will go under. So far, it has been a very profitable short for me. I am not 100% convinced on Sears Hometown, so I only have a small short position there. Both of these plays are a bit risky, since they are cheap on a revenue multiple basis. Sears Outlet is a wild card for SHOS. If it can grow that successfully, the stock may have upside. I have no faith in the Sears Hometown business as it has had negative same store sale numbers for years. I know a lot fellow financial bloggers are long SHOS and I am open on seeing their analysis. So far, I have been wrong as SHOS. It has bounced nicely from $30 to $35 recently.

Xerox (XRX)

I bought Xerox around $6.50. The stock is around $7.20 today. Nothing fundamentally has changed about the company since I wrote the bullish case. It still trades at a significant discount to FCF and has increased its dividend. I still think there is significant upside.

Genie Energy (GNE)

Genie was a quick arbitrage trade on its offer to exchange common shares for prefered shares. I booked little less than a 10% profit on the trade. I still think there may be an opportunity on this type of trade in Genie in the future. Nobody will exchange the common for the preferred as the common is trading higher than the preferred.

Pandora (P)

I have a small short position in Pandora. So far, it has not been a good trade as the stock has shot up from $8 to $10. I continue to believe that this company will not exist in the future. It really has no barriers to entry, no competitive advantage, and is not profitable. Obviously, a lot of Pandoras profitability depends on the outcome of the Internet Radio Fairness Act. However, there is no doubt that there will be more competitors in this space in the future. I will keep this short position.

Susser Holdings (SUSS)

Susser is up about a $1 from what I bought it at. It may take some time for this stock to go up. However, it should be able to expand a lot faster after the spin-off of SUSP. I have a small position and will keep that position.


I also missed out in some of my other bullish calls such as Facebook, Lumos Networks, Nacco Industries and Einsteins. I wrote a bearish case on Western Union, but the stock has been up since then. I still believe in the bearish case. I believe that Western Unions biggest competitor Moneygram will have a tough 2013 due to Western Unions price cuts. I will be looking to short in 2013.

DIsclosure: I own or am short most of the positions

NOOF Up 50% On Take Over Offer

Only a week after my article on New Frontier Media (NOOF), the company received an another take over offer. 

Larry Flynt, famous for Hustler Magazine, is offering up to $2.08 for the company. Shares were up over 50% to close at $2.00. 

I wish I could say I had invested in NOOF, but it was a bit too speculative for me.

Disclosure: I unfortunately do not own shares of NOOF

Sanofi Dutch Tender Offer Results

Lemtrada LogoYesterday, I wrote about a modified dutch tender offer on Sanofi (SNY) CVRs (GCVRZ). Today, the results were announced. Only 40,025,805 of the 86,766,040 shares the company was offering to buy were tendered at the maximum price of $1.75. It seems people are looking for bigger payout on the hopes of the drug Lemtrada™. Today the shares are trading at $1.77.

See the Sanofi press release here.

Disclosure: I do not own shares of SNY or GCVRZ

Speculative Adult Industry Play, NOOF

New Frontier Media


New Frontier Media (NOOF), the producer and distributor of erotic movies, is involved in a takeover battle. The company, which trades at $1.31, has a tangible book value near $2 and has .76c in cash.


Here is the timeline of what happened:  

  • Longkloof Ltd., an offshore Channel Islands investment company, offered $1.35, on March 9th. It already owned 15.9% of NOOF at that point.
  • Manwin, an adult entertainment IT company headquartered in Luxembourg, quickly beat that offer at $1.50
  • Longkloof came back at $1.75 and unsuccessfully tried to put 4 members on NOOF’s board.
  • NOOF fired their CEO claiming that he was siding with the Longkloof takeover.
  • David Nichols, a member of a special committee that NOOF has made up to review the takeover, resigned saying that the committee was not doing what was best for the shareholders.
  • NOOF claimed that David Nichols was siding with Longkloof.
It is interesting that NOOF trades at such a discount to the takeover offer and is protected on the downside by cash and tangible book value. It is also almost breaking even. It might be worth a shot for speculative investors.
Disclosure: I do not own shares of NOOF.

Speculative Sanofi Play

Sanofi LogoMoneyTurtle reported on a neat speculative play on a Modified Dutch Auction Tender Offer by Sanofi (SNY) to purchase 30% of its outstanding Contingent Value Rights (CVRs). Unfortunately, the Dutch Tender expired on Friday, but the CVRs (70% that will be left) still trade on the open market under the symbol GCVRZ.

CVR Details

The CVRs were issued as part of the Sanofi acquisition of Genzyme. They are based on the success of the multiple sclerosis drug Lemtrada™. The CVRs trade at $1.70 and if Lemtrada is a huge success, it can pay as much as $13. Here are the details from the sec filings:

“A holder of a CVR is entitled to cash payments upon the achievement of certain milestones, based on production levels of Cerezyme® and Fabrazyme®, U.S. regulatory approval of Lemtrada™ (alemtuzumab for treatment of multiple sclerosis), and on achievement of certain aggregate net sales thresholds, pursuant to the terms of a Contingent Value Rights Agreement to be entered into between sanofi-aventis and a trustee mutually agreed upon between the parties (the “CVR Agreement”), as follows:

  • Cerezyme/Fabrazyme Production Milestone Payment. $1 per CVR, if both Cerezyme production meets or exceeds 734,600 400 Unit Vial Equivalents and Fabrazyme production meets or exceeds 79,000 35-milligram Vial Equivalents (each such measurement is defined at “Description of the CVRs—Selected Definitions Related to the CVR Agreement”) during calendar year 2011 (the “Production Milestone”).
  • Approval Milestone Payment. $1 per CVR upon receipt by Genzyme or any of its affiliates, on or before March 31, 2014, of the approval by the U.S. Food and Drug Administration of Lemtrada for treatment of multiple sclerosis (the “Approval Milestone”). 
  • Product Sales Milestone #1 Payment. $2 per CVR if Lemtrada net sales post launch exceed an aggregate of $400 million within specified periods per territory (“Product Sales Milestone #1”).
  • Product Sales Milestone #2 Payment. $3 per CVR upon the first instance in which global Lemtrada net sales for a four calendar quarter period are equal to or in excess of $1.8 billion. If Product Sales Milestone #2 is achieved but the Approval Milestone is not achieved prior to March 31, 2014, the milestone payment amount will be $4 per CVR (however, in such event the Approval Milestone shall not also be payable) (“Product Sales Milestone #2”).
  • Product Sales Milestone #3 Payment. $4 per CVR upon the first instance in which global Lemtrada net sales for a four calendar quarter period are equal to or in excess of $2.3 billion (except that no quarter in which global Lemtrada net sales were used to determine the achievement of Product Sales Milestone #1 or #2 shall be included in the calculation of net sales for determining whether Product Sales Milestone #3 has been achieved) (“Product Sales Milestone #3”).
  • Product Sales Milestone #4 Payment. $3 per CVR upon the first instance in which global Lemtrada net sales for a four calendar quarter period are equal to or in excess of $2.8 billion (except that no quarter in which global Lemtrada net sales were used to determine the achievement of Product Sales Milestone #1, #2 or #3 shall be included in the calculation of net sales for determining whether Product Sales Milestone #4 has been achieved) (“Product Sales Milestone #4,” and collectively with “Product Sales Milestone #1,” “Product Sales Milestone #2” and “Product Sales Milestone #3,” the “Product Sales Milestones”).

No payments will be due under the CVR Agreement for any milestones achieved after the earlier of (a) December 31, 2020 and (b) the date that Product Sales Milestone #4 is paid.”

Modified Dutch Auction Tender Offer

The tender offer is interesting because Sanofi must think there is a reasonable chance that Lemtrada will get FDA approval and hit some of the aforementioned milestones.

Click here for more information about the tender offer.

Click here for more information about the CVRs.

Disclosure: I do not own shares of SNY or GCVRZ