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  1. #1
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    Default Investing in Special Situations

    G'day

    I'm a new poster to the forum and was wondering whether anyone else has investment strategies based around investing in "special situations"? I guess "special situation" is open to interpretation but to me it is to do with investing in companies selling at less than NTA, takeovers, mergers, spinoffs, turnarounds, and arbitrage. I've found investing in companies selling at less than NTA to be a pretty profitable pastime, i currently hold or held (among others) RBC, TEN, HQP, TTP, CPI (asx) which i bought into after being alerted to their undervalued assets. i'm pretty much a fundamentals based investor (but use a little TA at times on the buy side) and the less than NTA scenario usually means a nice "margin of safety" (provided that 'tangible' assets really are tangible!).

    Anyways, i've got some pretty large gaps in knowledge on a lot of the topics in this area such as arbitrage etc. so if any one else is willing to share their experiences and knowledge on some of these areas or point out some possible future asset plays i'd be all ears

  2. #2
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    Default

    WESTIE, You look like you have an open enquiring mind, that requires very little guidance. Arbitrage to my knowledge [buying in one market and selling in another] cant be done. You can do it with sport betting by by backing Australia to win in NZ and Nz to win in australia. I did it once on a lennox lewis david tua fight. I cant see how it might be worked on the share market, but let me know if you find a way. Best of luck MACDUNK

  3. #3
    Legend
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    quote:Originally posted by Westie


    To do with investing in companies selling at less than NTA, takeovers, mergers, spinoffs, turnarounds, and arbitrage. I've found investing in companies selling at less than NTA to be a pretty profitable pastime, (provided that 'tangible' assets really are tangible!).
    I'm not sure you have as much to learn as you think Westie. If a company is selling at less than NTA, that means the market is saying that the whole is less than the sum of its parts. That is almost the same as putting up a flag saying:

    "Look at me, I'm a takeover target."

    Alternatively incumbant management might take action themselves and float a portion of their business as a separate entity. A recent example of this is Tower spinning off its Australian wealth management business. Another alternative: the business may operate in a cyclical area of the market and be in a cyclical downturn. The business may 'come right' by itself.

    So to summarize takeovers, mergers, spinoffs, & turnarounds may all be sought out by looking for a company trading below its net tangible asset backing. This style of investing was first written about in the popular press by Ben Graham in the 1930s. One of Ben's better students was a chap by the name of Warren Buffett. So I would say you are in good company. Just keep doing what you are doing, subject to your rider of checking if those tangible assets are in fact fairly valued.

    SNOOPY

    PS A for arbitrage, this is a game for the big boys. Generally brokerage will wipe out any gains on paper that you can hope to achieve by this.


    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  4. #4
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    quote:Originally posted by Westie


    I currently hold or held (among others) RBC, TEN, HQP, TTP, which I bought into after being alerted to their undervalued assets.

    Just a few comments on the specific NZ examples you mentioned.

    Rubicon/Tenon are a value play on the assets of the old Fletcher Forests. Fletcher Forests and their rival Carter Holt Harvey had traded at a discount to asset backing for years. Then last year they finally took the hit that the market had been implying based on what shareholders were prepared to pay for their respectiove shares and took a large writedown on forest values. In other words they figured out that after about ten years of a downturn that the diminuition of some their their forest's values might be permanent! One scenario is that RBC/TEN will effectively sell all of their assets and return cash to shareholders. Any discount that might have been present is now unravelling, so best I think to ride the wave at this point. Sit and see what happens.

    Hirequip metamorphised out of the old 'Southern Capital'. Investment companies who make it their business to trade assets should always trade at a discount to asset backing. Boosts in NTA occur when assets are traded and deals struck.

    Generally focussed businesses trade at above asset backing, so there will be money to be made when a general menagerie of assets transforms into a focussed entity, as happened in the Southern Capital to Hirequip
    case. Provided, that is, the new focussed business can operate successfully! Sometimes the management style of an investment company is not compatible with that of stand alone focussed business! In this case the transition seems to have been made successfully, although whether this will still be the case when the market for hire equipment becomes less benign remains to be seen.

    Trans Tasman Properties is a difficult case because the interests of all shareholders are not equal. Incumbant majorioty shareholder management have set up the company so that they can take cash out by way of management fees, rather than dividends. As a minority shareholder you are stuck, and the movement of head office to Singapore will not be in your interests. Of course the market knows all this which is why the company trades at such a big discount to asset backing. How big the discount should be to fully reflect the risk is something I cannot answer. But while current management remains in control, I can't see how a value anywhere near asset backing will ever be extracted from this share.

    SNOOPY

    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  5. #5
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    quote:Fletcher Forests and their rival Carter Holt Harvey had traded at a discount to asset backing for years.
    Snoopy, I've enjoyed reading your "investing like buffet" threads on the other site, being a self prolaimed "value investor" of sorts myself. Perhaps a value investing thread here would be of some value (mind the pun). I've followed Buffet and other value investors for a while now, you just can't fail to pick up great ideas from them. With regards to the quote above, one idea was from one of the guys from Tweedy Browne or Sequoia (can't remember which). The idea is that of a catalyst. You can have stocks with clearly underappreciated value but you also need to have a catalyst to bring out that value. Kinda like a catalyst in a chemical reaction. Without the catalyst, you have a "value trap".
    TEN was trading below asset backing for years before GPG stepped in at RBC. I bought in at around the same time as I figured that the catalyst was in place to realize the value. Interestingly, Third Avenue Funds run by Martin Whitman bought into RBC around 97c. Third Ave like their purchases to be 30% below estimated value so i'm holding on in there!
    With regards to TTP, well, this is probably a value trap. My horizon is 3-5 years but SEA's horizon is even longer. They have control of everything they need to run TTP and access its resources so they probably care little about the market quotes beyond whether or not the market is going to offer them the chance to purchase the whole co for less than its cash in the bank. But, you never know.

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