Thursday, April 23, 2009

The Missed Occasion Year to Date

Back in February, I was going through some companies that looked promising. One of them, Petro-Canada (TSE: PCA, NYSE: PCZ) was very attractive. It is on of the main integrated oil and gas company in Canada. Their business is diversified in three different fields: Natural Gas in North America, Oil Sands in Canada, and International Offshore.

Reading through their financial statements it seemed to me, using a long term perspective in the 5 year, that their stock was undervalued compared to the income potential of the company

Their return on equity over the last five years has averaged around 22% and their net profit margin of about 11% seemed to offer some kind of safety to the company if the financial crisis came to be longer than expected.

What I liked the most was their total debt/equity ratio. The advantage of such a low ratio resided in the fact that under a 100% Debt/Equity ratio, managers tend to work with the interest of shareholders on their mind (as well as theirs...), rather than spending time with the lenders to get more flexibility in their operations.

During the week ending the 20th of February, the stock price had ranged between 25.61$ and 28.02$ on the Toronto Stock Exchange. As of today, it is trading at about 37$. This would have ensured a minimum profit of about 30%. Over the same period, their Price/Earnings ratio has fluctuated between 3.8 and 4.6, a total bargain! So what happened?

It came about that I was not the only person appreciating Petro-Canada’s financial statements. Suncor, one of Petro-Canada’s competitors announced that the two companies we about to merge, sending Petro-Canada’s share up 20% in a single day, Petro-Canada being the acquired company.

Going through the process of learning how to invest, missed opportunities seem to be all over the place. But as long as I get a couple good shots, I should have decent results.

Full disclosure: the author has no position in PCZ or PCA.

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