Posted on
January 29, 2009,
10:31 am.
Via Securities Docket:
After a nearly three month period without an IPO in the United States, three companies are slated to go public in the US the week of February 9. The three companies are:
- Mead Johnson, an Indiana-based maker of baby formula, that is being spun out of its parent company, Bristol-Myers Squibb Co. Mead Johnson plans to list on the NYSE and sell 25 million shares in an estimated range of $21 to $24 per share.
- O’Gara Group Inc., a security firm, will seek to raise $144 million on the Nasdaq.
- Changing World Technologies Inc, a company that makes renewable diesel fuel, will seek to raise $35.75 million in a listing on NYSE Alternext.
Reuters reports that the last IPO to price was that of online university operator Grand Canyon Education Inc. back in Nov. 2008.
As an investor, I would be most interested in the spin-off. First, baby formula seems to be a necessary good. Mothers will always be buying it in good times or bad. Second, spin-offs usually present attractive buying opportunities due to institutional selling. For example, for funds that track indexes or have market cap rules for the stocks allowed in their fund, they will automatically be selling the new spin-off, regardless of whether its a great company.
Posted on
January 29, 2009,
12:16 am.
I’ve got three interesting arbitrage opportunities for you.
First are SPAC liquidations (via Dealsleuth).
Second is the recent Pfizer/Wyeth merger (via Dividend Growth Investor).
Third is one that I have been looking at for weeks, which is the acquisition of Image Entertainment (DISK) for $2.75 per share. Today there was a large sell-off without any news whatsoever. I purchased some shares. I can only assume that it was a hedgie selling off for other purposes.
Posted on
January 28, 2009,
12:04 am.
I haven’t done any short term technical analysis for a long time, so here’s a chart that looks interesting to me.
Disclosure: I own URI via the Fairholme Fund.
Posted on
January 26, 2009,
11:08 pm.
I’ve read or heard of many ideas suggested by many different people to rescue the banking and financial system in the U.S. My current perception is that any of these ideas would be preferable to whatever the Bush administration did and what the Obama administration might do. Breakingviews.com has an interesting good bank/bad bank idea:
The “bad bank” schemes being considered by President Obama’s administration have a central flaw: they involve government-backed entities buying banks’ dodgy assets, which in turn requires the immediate valuation of assets that trade at distressed prices, if at all. That increases the likelihood of error, risks rewarding obfuscation, and could leave taxpayers in a hole. There are better ways to structure bad banks.
To work properly, the incentives of all parties should be aligned as closely as possible. Bank rescues must distinguish between banks that are troubled but can be saved and those that should be allowed to die. As little as possible of the industry should be taken into public ownership. And taxpayers must be properly protected, so that the bad bank process does minimal damage to their economic interests.
There is a way to meet these objectives: allow banks to sell any assets they want, and have the government’s bad bank acquire them on a consignment basis with no initial cash outlay. Banks would achieve a return on their consigned assets only as the bad bank sold them or allowed them to mature. This “consignment shop” structure removes the initial valuation challenge that bedeviled the original concept of the Treasury’s Troubled Asset Relief Program.
Read the full article. I’m not sure if their proposal would work or not, but it sounds simple and I am definitely appreciative that Breakingviews recognized the importance of incentives in just the second paragraph of their article. The wrong kind of incentives got us into a financial mess, so I reckon that a solution must have the right kind of incentives if we are to get out of this mess sooner rather than later.
Posted on
January 23, 2009,
12:34 am.
Back in December, the closed end fund Fiduciary/Claymore Dynamic Equity Fund (HCE) announced that its Board adopted a proposal to liquidate the fund. The stock price jumped from 3.25 to 4.25-4.50. On the day of the announcement, the fund was trading at a discount of 27% to its net asset value. After the announcement, the discount narrowed to roughly 6%.
I believe this is a pretty good risk arbitrage opportunity. I think most of the shareholders will vote to liquidate. And after reviewing the actions of investors like Goldstein and Lipson, who have battled against closed end fund management that have refused to step down or otherwise make improvements for shareholders despite the fact of huge discounts to NAV or the fund is simply not meeting its benchmarks or objectives, when management actually advocates an action such as liquidation, I would take them seriously.
However, one would usually try to hedge the purchase of HCE in order to lock in the current 6% discount to NAV. The fund’s top holding is 5.8% in S&P depository receipts, followed by smaller positions in individual stocks such as AT&T, JP Morgan, IBM, and Honeywell. I’m not quite sure how one could acquire a good hedge. A dirty hedge might be to purchase SH, an etf from Proshares that tracks the inverse of the S&P 500.
Posted on
January 22, 2009,
9:34 pm.
By now, we all have heard of Bernie Madoff and how he defrauded investors of potentially billions of dollars. As dispicable a person as he is, Jim Altucher writes in the Financial Times that Madoff did have some very good stocks in the the remaining $300 million of his fund:
It looks like Mr Madoff (or whoever chose the stocks in his fund) liked to get involved in various special arbitrage situations. Some of these still exist and make for interesting stock picks.
For instance, it looks as though Mr Madoff played a lot of special-purpose acquisition company arbitrage: SPACs trading below cash. I like Madoff’s largest position, Hicks Acquisition . It went public, raised cash and is now looking for a business to buy. If it does not buy a business, or shareholders reject the deal, the cash raised is returned to shareholders. Hicks has $540m in cash and a market capitalisation of $480m. Trading below cash makes this a very safe play.
Mr Madoff also liked merger arbitrage: his second largest position at the end of September was Anheuser-Busch, which has since been acquired. When Mr Madoff bought the stock he had a potential 40 per cent annualised return implicit in it because of the arbitrage going on with Anheuser-Busch being acquired by InBev. The deal closed in November so Mr Madoff made his money.
It looks as though Mr Madoff also liked “closed end fund arbitrage”: buying closed end funds trading at significant discounts to their net asset value. For instance, he liked Eaton Vance Senior Income Trust and several closed end funds that were trading at 20-30 per cent discounts to their net asset values.
Yes, these stocks strike me as classic arbitrage situations in which old school value investors like Graham and Schloss would have engaged. Other, present day value investors have no doubt purchased these stocks as well. Seth Klarman has had many small positions in SPACs, like Hicks Acquisition, over the past year or so. Investors like Phil Goldstein and Arthur Lipson have specialized in investing in closed end funds that are trading at steep discounts to their net asset values.
These are good and profitable investing strategies if you know what you are doing. It’s extremely unfortunate that Madoff used his considerable talents to defraud his clients rather to help them.
Posted on
January 20, 2009,
8:43 am.
Mish congratulates Singapore for being the first nation to do something in this economic crisis that actually makes some sense, and that is cutting government salaries.
Singapore’s government said it will cut the salaries of its top public workers and ministers as a “sharp” recession threatens to increase job losses and hurt lending this year.
The top government salaries will fall 12 percent to 20 percent in 2009 and “may be subject to further adjustments given the volatility of the economy,” Teo Chee Hean, the defense minister who’s also in charge of the civil service, said in parliament today. The reductions are deeper than the pay cuts the government said it was planning in November.
Singapore is scheduled to unveil more measures this week to help companies cope with the deepening global slump, which caused exports to contract in 2008 by the most in seven years. The National Wages Council last week advised employers to freeze or cut pay rather than fire workers.
Little can be done to mitigate the current slowdown, which has spread to all parts of the economy, Trade Minister Lim Hng Kiang said in parliament today. The nation is facing unprecedented conditions in this “sharp” recession, he said.
I agree with Mish. Though a pay cut for top staff is largely symbolic, I think this type of symbolism is the right way to go. Private and public companies in the U.S. have are cutting the salaries of its top staff, so why not the government?
Posted on
January 19, 2009,
12:40 pm.
Five-year credit default swaps on U.S. Treasuries widened to 69.5 basis points from 61.1 basis points last Friday. This means investors are paying $69,500 a year to insure against default on $10 million worth of bonds. Thanks to Alea for the link.
Posted on
January 18, 2009,
4:42 pm.
I started another book recently called The Art of Shortselling. I purchased it after reading a review on Old School Value. The book was published in 1997, so some of the examples in it might not be very familiar to younger people like me, but the examples are great nonetheless, and some are timelessly famous like ZZZZ Best and Crazy Eddie’s. What stuck out to me in the book review was that, despite the title, the book is “focused on hardcore fundamental analysis.” After reading the first couple of chapters, this is definitely the case.
Take for example Jiffy Lube. The author uses Jiffy Lube in part as a case study in the importance of quality of earnings. One sign of low quality of earnings is when the company has a lot of extraordinary items and nonrecurring revenues. For example, in the case of Jiffy Lube, the CEO was one of four members in a partnership which owned a franchising entity called Lone Star. In one earnings quarter, Lone Star bought 24 centers and development rights from Jiffy Lube for $6.5 million. This was a nonrecurring item whose only benefit seemed to be to provide the illusion that earnings were up and therefore the operating business was good.
Most extraordinarily, one of the investment considerations in the 1986 IPO prospectus for Jiffy Lube was low quality of earnings. No kidding, this was actually in the prospectus:
In the past three years the Company has experienced substantial growth in income largely as a result of income from area development fees and items such as gains on the sale of real estate and Company Operated Centers. These sources, which are nonrecurring in nature and have enabled the Company to record a profit in such years, are expected to decline in magnitude….
Whether considering to buy long or sell short, an investor is well-advised to scrutinize the quality of earnings to determine if they are of low or high quality. And at the very least, read the prospectus!
Posted on
January 17, 2009,
11:21 am.
Simoleon Sense has been kind enough to link to several of my blog posts in the past. Please take the time to visit Simoleon Sense. Simoleon provides great link round-ups and focuses on value investing, behavioral finance, economics, and psychology.
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