Source: LINN Energy LLC
Since going public in late 2012, shares of LinnCo LLC (NASDAQ: LNCO) have lost about 20% of their value. Even after factoring back in the $5.76 per share in dividends the company has paid investors since going public, those who bought shares around the IPO are still down around 5%. These aren't the returns investors expected.
We can pinpoint LinnCo's losing ways to one event. Notice the drop in the stock price in July of 2013.
The event causing that sell-off was the disclosure by LINN Energy (LINE +0.00%) and LinnCo that the SEC had launched an informal inquiry into the company's accounting practices and hedging strategy. It's an event that LinnCo has yet to fully recover from even though the issues surrounding the inquiry have long been in the rear view mirror.
Many investors, myself included, used the sell-off to buy shares of the company and have better returns than those buying around the IPO. Because sell-offs are often times great buying opportunities, here are three things to be on the lookout for to take advantage of the next possible round of selling.
Another big merger
When LinnCo announced that it was buying Berry Petroleum for $4.3 billion in early 2013, the stock actually started heading higher as the deal was viewed as a good one for both LinnCo and LINN Energy. However, by the time the deal closed at the end of the year LinnCo needed to fork over another $600 million to Berry Petroleum's investors because of all the delays in getting the deal done. The stock actually fell from $34 per share down near $28 per share from the time the revised deal was struck until it closed.
With that history it's very possible that LinnCo's stock does fall again the next time it teams up with LINN Energy on a big merger. The last deal likely left a sour taste in investors' mouths as it has yet to deliver the promised dividend increase. However, shares have recovered quite nicely as Berry Petroleum is being integrated, which suggests that any sell-off due to another big merger announcement might be a buying opportunity for LinnCo investors.
Discount widens
What's interesting about LinnCo is that while its only asset is units of LINN Energy, its stock price has tended to trade at a premium to LINN Energy's units. Investors are basically paying a premium for LinnCo's income because it comes without the tax headaches of an MLP like LINN. However, as the following chart notes that premium has pretty much evaporated since the beginning of this year, and at times LinnCo has even traded at a discount to LINN.
One of the reasons for the growing discount could be due to former Berry Petroleum shareholders selling their LinnCo shares. That said, the market is fickle, suggesting that the discount could grow larger in the future. If it does that could very well be a buying opportunity because LinnCo's shares should at least trade on par with LINN Energy units, as each share of LinnCo is equal to one unit of LINE. However, analysts at Raymond James believe that LinnCo should actually trade at a 7% premium to units of LINN Energy, suggesting that a further deepening of the discount would really be a buying opportunity.
Someone says something
LINN Energy and LinnCo have caught the attention of analysts, investors and the financial media, all of which have no problem voicing their opinion. In the past these opinions, especially the negative ones, have caused LinnCo to sell off. Analysts' downgrades have sent the stock down numerous times in the past two years, and these downgrades tend to come in bunches. Meanwhile, the financial media knows it can get a rise out of investors by saying something negative on LinnCo or LINN Energy to spark a sell-off.
However, for long-term investors just interested in locking in a strong dividend yield, these sell-offs can become buying opportunities. So, the next time someone says something negative about the company investors need to consider the fact that LinnCo's dividend is more sustainable then ever, suggesting that this sell off might be good time to add more shares.
Investor takeaway
LinnCo has certainly had its ups and downs since going public. However, one thing has remained steady since day one and that's the company's dividend, which is only getting more secure. Because of that a sell-off isn't the end of the world, as it more than likely will open up a buying opportunity for investors to add more of this high-yielding stock to their portfolio.
