Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: In one of the more mind-boggling market moves recently, shares of LinnCo (UNKNOWN:LNCO.DL) -- the entity built exclusively to hold shares and facilitate acquisitions for parent company Linn Energy (NASDAQOTH:LINEQ) -- dropped more than 10% in March even as Linn's stock only fell 4%. What?!
So what: This right here, more than anything else, is proof that the market moves in mysterious ways. The only asset owned by LinnCo is 39% of Linn Energy's stock. Its sole reason to exist is so that an individual or retail investor can own Linn Energy without buying the units of the master limited partnership. Since LinnCo is listed as a C corporation, it pays taxes on the distributions it receives from the parent company and then passes out a dividend to its shareholders. By all rights, shares of LinnCo and Linn should trade at the exact same rate all the time, since LinnCo's fate is completely tied to Linn's.
There is no single reason that investors pulled out of both Linn and LinnCo this past month. A large factor could be that lower-than-expected commodity prices are starting to bring the company's distribution coverage for the year back into question. The company cut its distribution by 50% at the end of last year in anticipation of weaker cash flow, but its projected budget assumed oil prices would be a bit stronger than what they have been so far this year.
If oil prices don't improve this year, Linn's budget could be very tight.
Now what: While continuing concerns about Linn Energy's budget for 2015 make sense, LinnCo shares losing that much more ground than the regular shares of its parent company does not. If you are bullish on the future of Linn Energy today, then it's probably in your best interest to buy shares of LinnCo instead, since you will be getting a slightly better deal.