Tag Archives: nasdaq

3 Merger Arbitrage Opportunities

Summary The arb universe with highlighted opportunities. An idea on how to best time setting them up. One plug and play way to get these at a discount. What are today’s best merger arb opportunities? What are the arbs saying? 1. The first opportunity is to put together a portfolio by hand. The bolded opportunities are the seven that I see as the best risk-adjusted opportunities. Click on comments for additional deals on the specific opportunities. 2. Wait for the next antitrust suit Last fall’s abandonment of the AbbVie (NYSE: ABBV ) acquisition of Shire (NASDAQ: SHPG ) was an exceedingly well disguised blessing for arbs. While the SHPG price cratered before subsequently recovering fully, the chaos led to the best arb spreads relative to risk in years. Today, it appears as if the US antitrust authorities are probably preparing at least one antitrust enforcement action. If/when they block at least one of the current deals (Rexam PLC ADR ( OTCQX:REXMD )? Office Depot Inc. (NASDAQ: ODP )?), the other spreads will widen price-insensitively, leaving better opportunities, perhaps ones that rival last autumn’s. 3. Leave it to the pros While I am an avowed skeptic of the whole concept of “smart money,” this is admittedly a highly research-intensive and fact-specific investment strategy. So, you may want to seek professional help. Hedge funds such as Rangeley Capital are limited to accredited investors. I try to communicate my most actionable items to Sifting the World members, but sometimes you just want someone else to pull the trigger. What should you do? One candidate is to invest in GDL Fund (NYSE: GDL ). According to the fund’s objective, The Fund is a diversified, closed-end management investment company whose investment objective is to achieve absolute returns in various market conditions without excessive risk of capital. Absolute returns are defined as positive total returns, regardless of the direction of securities markets. To achieve its investment objective, the Fund, under normal market conditions, will invest primarily in securities of companies (both domestic and foreign) involved in publicly announced mergers, takeovers, tender offers and leveraged buyouts and, to a lesser extent, in corporate reorganizations involving stubs, spin-offs, and liquidations. The manager is someone I respect. The expense ratio of over 3% is indefensibly obscene, but less so than any hedge fund. The distribution yield is over 6%. The discount to NAV is over 17%. That discount is greater than the 5-year average and the YTD average. It is diversified across sectors. Top Sectors Consumer Services 16.28% Healthcare 12.21% Technology 12.20% Consumer Goods 8.07% Utilities 7.96% Oil & Gas 5.18% Basic Materials 4.64% Financials 4.57% Industrials 3.69% Telecommunications 2.09% Would I quibble with the specific positions? Sure. But does GDL deserve this deep a discount? I don’t think so. Does Gabelli Equity Trust (NYSE: GAB ) need an activist to come in and demand that they cut executive compensation? No comment. But if Mario Gabelli is available, he might want to take a look at it. Conclusion Today, there are some great merger arbitrage opportunities. Tomorrow, they could get even richer if we see a big antitrust suit against one or more of the current deal crop. If you want to take a dip but don’t want the bother, consider GDL as one way to get exposure at a significant discount. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long PRGO, ALTR, ISSI, WMB, BHI, DEPO, PNK. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

The Great Fall Of China: A Wake-Up Call

Three years ago, I said not to be scared of China and that its blue chips were safe. I’ve now changed my mind. Increasingly I’ve come to see Chinese stocks as policy-driven at best, and completely speculative at worst. For those who still desire China exposure, I suggest four stocks with high-quality management and less exposure to the China madness. Three years ago I was living in Hong Kong and I wrote that more investors should consider Chinese “blue chips.” I believed in the China reform story. In some ways, I still do – but in the very long term. I wrote that, after some low-level scandals in the market, the bigger stocks — those dual- or triple-listed in China, Hong Kong and the US — were safe, thanks to the extensive requirements for financial reporting. But I have come to realize that Chinese stocks are driven by the speculative greed and fear of the Chinese retail punter, and the vast majority of those punters have no concept of fundamental analysis. In a country with a singularity of government, government policy (and worse, just rumors around government policy) drive price action in stocks. Insider trading is rampant. Even stocks in listed Hong Kong can be suspicious. Muddy Waters Research’s short on Superb Summit , and the Financial Times calling out Hanergy , which was later suspended from trading, are just two examples. The environment in Chinese markets these days reminds me of the US markets of the era of Robber Barons, where those big players in the know profited from the unsophisticated average investor. (For a great read on the era of the Robber Barons, pick up Fifty Years on Wall Street by Henry Clews, originally published in 1908, which explains how the Robber Barons like Jay Gould, Daniel Drew and Commodore Vanderbilt made their fortunes.) Now the Chinese government is going after some of these so-called manipulators, many of whom have come from large Chinese brokerage houses. What kind of a market is where apparently institutional investors are banned from selling shares? It is one of total madness. Also, with State-Owned Enterprises like many of those listed in my original article, unfortunately I’ve seen very slow progress. They are still run as tools for policy, not for shareholder returns. The recent actions by the Chinese government to try to prop up the stock market demonstrate that clearly. And with hundreds of stocks suspended, daily index closing prices in Shanghai are not a true indication of where the markets should really price. While diversification is important, Warren Buffett has always said to “stick to your knitting.” Investors wanting China exposure also need to have very long-term holding horizons — to let the very slow reforms taking place in China move into place. It means that even those Chinese stocks listed in the US are likely to prove very risky, given the level of diversification they may provide to your overall portfolio. Even with the best intentions, the average Chinese management team is largely at the mercy of Chinese policy. Even the ADRs of dual-listed stocks — thanks to the larger trading volumes in the China-listed shares – are driven by and suffering from the short-term, highly speculative (and, frankly, messed-up) nature of Chinese capital markets. So what’s the solution? Obviously, one can avoid China altogether and lose out on exposure to “The China Century,” as Jim Rogers puts it. The least demanding option is to buy China ETFs such as FXI (NYSEARCA: FXI ) or MCHI (NYSEARCA: MCHI ). A third option is to be extremely selective on individual stocks. Do your homework on management teams and avoid stocks listed in Mainland China in order to reduce the volatility related to the speculative behavior of Mainland investors. One stock I like in this regard is Baidu (NASDAQ: BIDU ). Morgan Stanley has a price target of $248 on the stock, and according to Jefferies , Baidu is over 50% cheaper than Google. But for me, more importantly, it’s about CEO Robin Li. He was educated and started his career in the US and he is highly visible in Western media. His personality has won my confidence. (See interviews with him here and here .) Obviously Baidu is a “new China” play, and some may argue that it’s already fairly priced, or that they prefer Google in terms of investing in search. Three other stocks I like are China-centric conglomerates with Western or Western-style management with extremely long track records of sensible management of their assets. They are Hong Kong-listed CK Hutchison Holdings ( OTCPK:CKHUY ) (the result of the restructuring of Hutchison Whampoa and Cheung Kong Holdings), run by Asia’s richest man, Sir Ka-Shing Li; Hong Kong-listed Swire Pacific ( OTCPK:SWRAY ), controlled by the British Swire family; and Singapore-listed Jardin Matheson ( OTCPK:JMHLY ), controlled by the British Keswick family. These three conglomerates give you exposure to both industrial and consumer operations globally, but with a bias towards China trade. Although they are in very much “old economy” areas, such as property, infrastructure, energy, automobiles, transportation and telecommunications, they are run by highly respected management teams and have very long histories of revenue growth and dividend payments. The recent falls in their stock prices provide good entry points for long-term holders. While these are not get-rich-quick stocks, they will offer reasonable, equity-like returns with the safety coming from sound operations and solid management teams. As mature cash cows, they benefit from China’s long-term evolution, but involve less risk than other, “more Chinese” stocks. I have lived in Hong Kong for 5 years, been to the mainland many times and followed the Chinese stock market for the last 12 years. Right now these are the only four “China stocks” on my radar, thanks to my unease with the development of Chinese capital markets. I would recommend buying CK Hutchison and Swire Pacific on the Hong Kong exchange, tickers 0001 and 0019 respectively, and Jardine Matheson on the Singapore exchange, ticker J36. That’s because the local exchanges offer far more liquidity, and hence cheaper trading costs, than OTC / pink sheets in the US. In a side note, for those interested in shareholder friendly reform in Asia, Japan is making a lot of progress in that area with recently implemented corporate governance and share owner governance rules starting to bear fruit. From a macro perspective, it would be no surprise to you to know I prefer Japanese stocks over Chinese stocks given a 20- or 3-year time frame. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BIDU over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

4 (Or Is It 6?) Years In The Making

Volatility is back – there’s no getting around it, and we’ve got ourselves a nice little 10% correction from earlier this year. Last week, we saw big intra-day swings in the markets across the globe, and yesterday, we saw more of the same, with the S&P 500 (NYSEARCA: SPY ) off nearly 3% at the end of the day and the international markets off further. (Of course, the US market was actually up last week, but who’s counting?) The past few weeks have struck many as a bit of a shock, in large part because it has been some time since we’ve had really any volatility in the markets at all. The VIX (S&P 500 volatility) has spiked back to levels we haven’t seen since late 2011: (click to enlarge) But we still pale in comparison to the huge swings in 2008 and 2009: (click to enlarge) The primary issue is that we got comfortable. Really comfortable. I talked about this earlier – when we were fat and happy and too cozy in our calm markets to be bothered to remember what markets do on a regular basis. I see the irony in my post: “I don’t know what the catalyst will be. More aggressive Fed tapering? Global unrest? An unseen recession? Political turmoil? War? Most likely it will be something none of us saw coming – that is how these things usually work out.” Last year, not too many people said that we’d be getting a correction because of fears of a Chinese economic slowdown or because the anticipated-for-five-years-now Fed rate hike was finally (maybe) coming around the corner. I certainly didn’t. The only thing you should be thinking with these kind of short-term corrections is “This is what stocks do.” Put it on a post-it on the bathroom mirror or on the back of your phone or the side of your monitor or wherever you need the reminder. Stocks go down! Sometimes they do it quickly (see November 2008-March 2009), and sometimes it takes quite a while (see 2000-2002). Sometimes they go down a little (do you even remember the decline in 2011?), and sometimes they go down a lot. Sometimes it’s because of a recession, and sometimes it’s not. Every time someone you’ve never heard of will get credit for “predicting it,” and every time someone who has been bearish for the last 20 years will revel in their brief vindication. Each and every time, you will have an opportunity to decide how you will respond. Are you going to stare at the market every day? Are you going to anchor on what your account value was three months ago and bemoan your “losses?” Are you going to find some market commentator who told you he saw this coming and now know exactly what you should do next? Here’s what you should probably do when stocks go down: Nothing. Boring advice, I know. But usually, you should do nothing. Sometimes there’s an opportunity to take some tax losses. Sometimes it will warrant rebalancing (though rarely upon a 10% correction, depending on your rebalancing rules). Most of the time, you’re going to do nothing. We’re not good at doing nothing (more on that later), but give it a try. Go outside or read a good book and tell yourself “This is what stocks do,” and do nothing.