Author Topic: Returns from Special Situation trades  (Read 41161 times)

alwaysinvert

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Re: Returns from Special Situation trades
« Reply #20 on: July 19, 2019, 12:04:34 PM »
My experience with spinoffs is that you need some kind of wrinkle, preferrably some mechanical aspect, that makes the mispricing. I seldom see a straight spinoff having some obviously mispriced parts these days. From large caps they are almost uniformly garbage.

 You've got to 1. think about the timing in a manner that is contrarian - buying in before or after, selling and buying the correct ones after the spin 2. find some kind of mechanical edge (i.e. predict the selling and buying pressure).

The exercise is inherently a bit speculative because you also think about how the market will price the pieces. Is one a story stock? Will one pay large dividends and what kind of yield is reasonable for that stock? And so on. But I have found it valuable to watch for these situations where the lens through which the market views the companies might change for one reason or another (not only in relation to spinoffs, but also more generally). At the very least that gives you some nice extra optionality if you also happen to like the case on a fundamental basis.

As for other special sits, I like to look at situations that are "between buckets". They can't fit neatly into just one category, so pure arbers won't do it and long-only players won't bother or even sometimes can't. For one of these already played out cases you can read the RADH thread. Of course, it also helps to have some kind of local knowledge or special insight. Pure merger arbs are almost always too tightly spread to do without very heavy leverage and major diversification.

Another play which the "illiquid arbitrage pairs" reminded me of is either peers arbs between countries (could be fruitful but fraught with complications, obv) or between "undiscovered" peers, which I would call companies that are more similar than the market pricing currently recognizes. This could be because one is illiquid and one is not or that there are severe accounting differences but less underlying business differences. I don't bet on mean reversion between these as that may never happen, I only look to long the cheaper one.

Finally there is the "read between the lines" corporate events. I'm not sure I need to explain these in great detail - it's about making some qualified guesses based on the "umms" and "ahhs" or general hints by owners or management. My track record has been mixed with these in spite of most often being generally correct on the direction. The main thing to look out for, as long as your interpretation is correct, is extended timeline and/or business deterioration risks.


writser

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Re: Returns from Special Situation trades
« Reply #21 on: July 19, 2019, 12:07:19 PM »
Good post above.

I think there are still some good opportunities out there but you have to put in the time and effort. Searching EDGAR for 'odd lot' every once in a while is not that and if you think you can easily beat the market by running some EDGAR searches a few times a week I think you are being optimistic. Same for buying a spinoff the day after and selling it a year later. Maybe such 'easy tricks' worked a few decades ago but not anymore (and I have my doubts about whether it was so easy back in the days). Most opportunities involve more analysis than skimming through a filing, timely analysis, diligently monitoring the trade ticker, patience and have a wide range of outcomes. And perhaps more importantly, they involve pain and uncertainty (hence the opportunity - the market pays you to feel like shit because other market participants don't want to). As Alwaysinvert mentions the clear-cut cases are seldomly priced attractive.

All in all, as others pointed out, unless you have the time to spend a few hours every day sifting through boatloads of news and monitoring countless quotes you might be better off buying some value stocks instead. Actually I'd say you are probably better off buying an index fund but that's not something visitors of this forum want to hear. And even if you have the luxury of so much spare time there are the questions of 1) are you nerd enough to actually enjoy the process 2) don't you have something better / more fun to do 3) is your portfolio large enough to make it worth your while on an hourly basis and 4) is your portfolio small enough that you can deploy significant amounts when small pockets of inefficiency appear. Something between $1m and $10m is probably the sweet spot. With $100k you are better off refurbishing routers and with $100m a lot of opportunities are simply too small.
« Last Edit: July 19, 2019, 12:28:13 PM by writser »
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

scorpioncapital

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Re: Returns from Special Situation trades
« Reply #22 on: July 31, 2019, 01:11:32 AM »
My rule is only do arbitrage, special situations if you would own the companies even without the deal because you like the business or company. Don't have to like it alot but enough to say it's something I'd own anyway without the deal.

That way there is less disappointment if something goes wrong.

5xEBITDA

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Re: Returns from Special Situation trades
« Reply #23 on: July 31, 2019, 08:00:41 AM »
My rule is only do arbitrage, special situations if you would own the companies even without the deal because you like the business or company. Don't have to like it alot but enough to say it's something I'd own anyway without the deal.

That way there is less disappointment if something goes wrong.

This is great advice, and in fact you can take it a step further by saying don't invest in any business unless you'd be ok owning it if you were to get stuck with it for years.

Hielko

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Re: Returns from Special Situation trades
« Reply #24 on: August 04, 2019, 01:26:48 AM »
I think itís terrible advice for special situations. Your buying them for the specific situation, not for the long run. If the situation is attractive itís worth investing, itís as simple as that.

skanjete

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Re: Returns from Special Situation trades
« Reply #25 on: August 04, 2019, 10:59:55 AM »
Spot on: special situation investing = "the market pays you to feel like shit... "

BG2008

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Re: Returns from Special Situation trades
« Reply #26 on: August 04, 2019, 08:46:47 PM »
I think itís terrible advice for special situations. Your buying them for the specific situation, not for the long run. If the situation is attractive itís worth investing, itís as simple as that.

I think the problem is that if the special situation doesn't work, you're left holding a bag of dog poo.  Howard Hughes is a really good special situation right now.  I am not going to go into the specifics of why I think it's worth a lot more than the current price.  A lot of that analysis is years of research and meeting with management.  The company has told you it's exploring strategic alternatives.  It's not like NYRT in its liquidation.  I would go so far to say that it is currently the mother of all special situations.  If it isn't for the size of the position, I would probably be buying more.  If they sell the company, you'll likely get a lot more than the current price.  If they don't sell the company, short term pain.  But the company is still worth a lot more than what it is trading at.     

scorpioncapital

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Re: Returns from Special Situation trades
« Reply #27 on: August 05, 2019, 01:25:03 AM »
special situations should always be done as a basket, to diversify away the risk of some disasters that break.
however, what I meant was that if you are going to concentrate in a special situation then it should be one where you like the company enough to have to hold it in the worst case, or alternatively a situation where there is minimal loss either way.

writser

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Re: Returns from Special Situation trades
« Reply #28 on: August 05, 2019, 03:45:52 AM »
All these beautiful rules:

- special situations should always be done as a basket
- if you concentrate you have to like the company
- minimize losses

Are overly simplistic. Judge each situation on its own merits. Size appropriately according to the risk/reward. A loss is a perfectly acceptable outcome if the potential profits make up for it. It seems you are more focused on minimizing potential losses and potential disappointment rather than maximizing expected value, which nicely demonstrates the point I was trying to make a few posts before. The market pays you to own the crap others don't want to hold because it makes them feel like shit.
« Last Edit: August 05, 2019, 03:47:41 AM by writser »
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

scorpioncapital

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Re: Returns from Special Situation trades
« Reply #29 on: August 05, 2019, 04:32:56 AM »
I don't believe in expected return. It's a garbage concept.
My feet are in the oven. My head is in the freezer. On average, I'm perfect temperature. In reality, I'm dead.