Poll - 2018 Stock Picks - Include Rights?

[Oliver Mander]

This poll is what it says on the tin...do we include the impact of rights issues in the 2018 stock picks?
(ie, increase in investment, time-weighted %age)

[777]

Bumped.....

[Snow Leopard]

There are currently two 'rights issues' in progress on the NZX and they are very different:

HBL where the right can not be traded (use it or lose it);

TWR where the right can be sold on market.


So for the 2017 contest:

the HBL instance I intend to ignore (where does the money come from to buy extra shares?);

the TWR rights will be 'sold' at the closing price on the last day of trading and either new shares purchased on market with the proceeds or the cash amount treated like a dividend.

You can always rely on me to complicate the issue :p.
https://www.cryptokitties.co/images/landing-kitty15.svg

[winner69]

There are currently two 'rights issues' in progress on the NZX and they are very different:

HBL where the right can not be traded (use it or lose it);

TWR where the right can be sold on market.


So for the 2017 contest:

the HBL instance I intend to ignore (where does the money come from to buy extra shares?);

the TWR rights will be 'sold' at the closing price on the last day of trading and either new shares purchased on market with the proceeds or the cash amount treated like a dividend.

You can always rely on me to complicate the issue :p.
https://www.cryptokitties.co/images/landing-kitty15.svg

And often when you 'lose it' you get a little bonus cheque if they sell the shortfall for more

[Snow Leopard]

And often when you 'lose it' you get a little bonus cheque if they sell the shortfall for more
Forgot HBL doing that, (I applied for all mine:t_up:) I will include that when we know what it is then.

[Oliver Mander]

There are currently two 'rights issues' in progress on the NZX and they are very different:

HBL where the right can not be traded (use it or lose it);

TWR where the right can be sold on market.


So for the 2017 contest:

the HBL instance I intend to ignore (where does the money come from to buy extra shares?);

the TWR rights will be 'sold' at the closing price on the last day of trading and either new shares purchased on market with the proceeds or the cash amount treated like a dividend.

You can always rely on me to complicate the issue :p.
https://www.cryptokitties.co/images/landing-kitty15.svg

That's exactly why (if we do it) I thought its fair to assume you take them up in the comp - HBL's were not traded, so can't ascribe a value.
So...

base investment at January 1st = $10,000 comprising $10,000 shares.
rights issue on June 30th 2018 for 2 for every 10, at a price of $1.10 each.
=> new base investment = $10,000 + $2,200 = $12,200 comprising 12,000 shares
at end of year, shares are $1.20 - or $14,400

$ return = $14,400 - $10,000 - $2,200 = $2,200
%age return:
- base: $2,000 / $10,000 = 20%
- rights: $200 / $2,200 = 9.1% x 2 for half a year = 18.2%
total return %age = 10,000/12,000 * 20% PLUS 2000/12000 X 18.2 %
= 19.7%

The power of spreadsheets make this all very easy...:cool:

[Snow Leopard]

That's exactly why (if we do it) I thought its fair to assume you take them up in the comp - HBL's were not traded, so can't ascribe a value.
So...

base investment at January 1st = $10,000 comprising $10,000 shares.
rights issue on June 30th 2018 for 2 for every 10, at a price of $1.10 each.
=> new base investment = $10,000 + $2,200 = $12,200 comprising 12,000 shares
at end of year, shares are $1.20 - or $14,400

$ return = $14,400 - $10,000 - $2,200 = $2,200
%age return:
- base: $2,000 / $10,000 = 20%
- rights: $200 / $2,200 = 9.1% x 2 for half a year = 18.2%
total return %age = 10,000/12,000 * 20% PLUS 2000/12000 X 18.2 %
= 19.7%

The power of spreadsheets make this all very easy...:cool:

I see that you can complicate it even better than I can.

If you are going to buy an 2,000 new shares @ $1.10 ($2,200) then you need to sell sufficient existing shares to provide that $2,200.
So if the market price at that time is (for example) $1.15 you sell 1,913 shares to buy 2,000 shares and you gain is 87 shares.

End of year = 10,087 shares at $1.2 = $12,104.35 or 21.0435%

[Then remember to handle the interim dividend on 10,000 shares before 30-jun and the final dividend on 10,087 after 30-jun)

[winner69]

Snoopy had a good suggestion as to how to handle rights

Can't quite recall what it was but it was good

[Baa_Baa]

Snoopy had a good suggestion as to how to handle rights

Can't quite recall what it was but it was good

For the sake of a competition, can one assume 'rights' are taken up by all shareholders and therefore accrue to the value of the (their) SP performance, if not or maybe the head share (?) which is the measure of performance. What happens to those who do not take up their 'rights', should they be penalised, or is 'rights' treated as a blanket gain on a SP? Confusing, which is probably why it has been left out of previous PS comps.

I don't think discretionary gains through rights should be incorporated into SP performance.

[777]

The value of the right can easily be calculated whether traded or not. That amount can be simply be cash and added in like dividends.

[Kay]

Never participated in this but for what its worth I think if you make a prediction in January for the performance of a stock over the year the potential for rights issues (or not) over the year should be considered at the time you make your selection.

Never a good idea to over complicate a parlour game...unless everyone promises to stay sober!

[t.rexjr]

Any rights are valueless unless taken up (bought) or transferred (sold) are they not? Neither of which is possible once comp is underway. In a similar light I assume one can’t opt for DRPs. At some point to convert them, cash is required. Cash we don’t have as it can only be spent on not staying sober.

[Oliver Mander]

I see that you can complicate it even better than I can.

If you are going to buy an 2,000 new shares @ $1.10 ($2,200) then you need to sell sufficient existing shares to provide that $2,200.
So if the market price at that time is (for example) $1.15 you sell 1,913 shares to buy 2,000 shares and you gain is 87 shares.

End of year = 10,087 shares at $1.2 = $12,104.35 or 21.0435%

[Then remember to handle the interim dividend on 10,000 shares before 30-jun and the final dividend on 10,087 after 30-jun)

Quite like this model PT. Simple.
dividend handling is easy...

If we do it, will do it that way...

[Snoopy]

Snoopy had a good suggestion as to how to handle rights

Can't quite recall what it was but it was good

The discussion may be found here.

https://www.sharetrader.co.nz/showthread.php?10434-2016-Stock-Picking-Contest/page2

To put this in the context of Sylvestor's theoretical Heartland cash issue of June 2018

$10,000 worth of base shares at $1 per share means each share is worth $1 at the start of the year (I prefer to think on a 'per share' basis).

On 30th June 2018, new shares were offered at $1.10, in a ratio of '2 for every 10' (one share for every 5 held). Put another way, this means that for every 1 share held, each shareholder was entitled to 0.2 of a new share at a price of $1.10.

Translating this into algebra for any time after the cash issue, leads to the following equation for determining the equivalent rights issue value adjusted price from any future subsequent market price 'P' on any future date.

P + 0.2(P-1.10)
=1.2P-0.22

Note that in the equation above, the $1.10 rights issue price is subtracted out of the equation. Thus the end result only reflects the market premium to the cash issue price that applies on competition close date. The $1.10 that the investor put in to buy each new share is not counted.

As an example, with an end of year 2018 market closing price of $1.20, this equates to a 'rights issue adjusted closing price' of:

1.2($1.20) - 0.22 = $1.22 (*)

All of the above assumes that the new shares are retained by the investor. If the new shares are sold by the investor then you could treat that sale price above the cash outlaid as an 'extra dividend' as some others have suggested. But then of course you have the extra complication of determining what the sale price is....

SNOOPY

(*) This is slightly different to Sylvestor's answer of 19.7%. Sylvestor has taken into consideration the 'time value of money' and doubled the annual percentage return on the rights shares because they were held over only six months, which I haven't done. But he has also included the full return on the new capital required to take up the new shares. That's not 'wrong'. But I don't think it is within the spirit of the rules to introduce new capital into the competition for only those competitors who happen to pick a share with a rights issue that comes up later. I prefer my approach where the new capital is subtracted out. That means my calculated return is from the 1st January shareholder capital only, which is I think the fairer approach.

[777]

bumping......

[Snow Leopard]

...
On 30th June 2018, new shares were offered at $1.10, in a ratio of '2 for every 10' (one share for every 5 held). Put another way, this means that for every 1 share held, each shareholder was entitled to 0.2 of a new share at a price of $1.10.

Translating this into algebra for any time after the cash issue, leads to the following equation for determining the equivalent rights issue value adjusted price from any future subsequent market price 'P' on any future date.

P + 0.2(P-1.10)
=1.2P-0.22

Note that in the equation above, the $1.10 rights issue price is subtracted out of the equation. Thus the end result only reflects the market premium to the cash issue price that applies on competition close date. The $1.10 that the investor put in to buy each new share is not counted....

The issue I see with your approach Snoopy is that to achieve this you effectively have to make an interest-free loan for the entire value of the rights issue to the contestant.

They are getting new shares for nothing and they get the upside of any leveraged gains (or the downside of the loss).

Best Wishes
Paper Tiger

[Oliver Mander]

Don't forget to vote this poll stays open until December 16th, so will make a decision then. Great comments discussion so far too...

[Snoopy]

The issue I see with your approach Snoopy is that to achieve this you effectively have to make an interest-free loan for the entire value of the rights issue to the contestant.

They are getting new shares for nothing and they get the upside of any leveraged gains (or the downside of the loss).

Best Wishes
Paper Tiger

I agree it would be unwise to make an interest free loan part of the competition. But I am not suggesting that.

My equation for the 'one in five' ( 1/5 =0.2 ) rights issue takes the market price for each new share and removes $1.10 from that price.

P + 0.2(P-1.10)

That $1.10 is the price that the rights holder must stump up for new shares. So yes, you can say that I am giving the shareholder $1.10 to take up each new share. But in the same breath I am removing $1.10 from the post rights issue valuation. I am giving the shareholder $1.10 and taking away $1.10 so the net effect of the transaction should be zero, as far as any new share capital is concerned..

The only thing the shareholders get for nothing is the gain in share price over and above the application price, which is as it should be IMO. Of course if subsequent to the share issue the share drops in price then the decremental loss (downside change from $1.10) is leveraged which is again as it should be.

There is no windfall for cash issue participants though. Remember the share price usually drops on such an announcement!

SNOOPY

[Oliver Mander]

Hi all...

Well, it looks like the "include rights issue" vote has won by the slenderest of majorities. So we will do that.
I think Snoopy's and PT's comments to NOT introduce extra capital, as it goes against the spirit of the comp, are very pertinent and well made. As is the comment that rights DO affect the value of the head share, so need to be taken into account.

The Snoopy approach of recognising upside/downside for the remainder of the year, without increasing capital, seems reasonable to me. While keen on the "time value of money", I see the Snoopy formula is based off the initial capital. In the spirit of the rules, this seems reasonable to me...so will adopt the Snoopy formula as the calculation.

Cheers
Sylvester