Kamikaze trade might pay off

9 Comments

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  Wexboy February 24, 2012 at 12:55 pm

  I have one of these, Richard – I’m (possibly) so enthused about it, I might even do a write-up and…buy more!! Hmm, maybe I’d like to see another set of accounts first… You’re right, in one sense, it’s v easy to hold one of these..in another sense, it’s like parachuting in the dark…a comfortable ride, until you hit a happy, or disastrous, landing..!

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    Richard Beddard February 24, 2012 at 1:12 pm

    Hi Wexboy. Glad to hear it (and I look forward to the write up because yours are always entertaining!). At the time I really didn’t know anyone else was doing this (although I felt sure there were) so it did feel like a leap into the unknown. I didn’t write about it either because it was an experiment and a. I didn’t want people thinking I was completely bonkers and b. I didn’t want them following me into oblivion!

    You know, I hadn’t even thought of buying more. It’s logical considering I don’t want to sell because I think they’re undervalued but the imperative not to invest in unlisted companies is deeply ingrained! Food for thought.

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  Trident February 24, 2012 at 6:18 pm

  I think you’re right – these de-listings do scare investors and lead to mispricings.

  Late last year MDY Healthcare (basically now a holding company with stakes in two companies) announced the disposal of one of its investments with proceeds in excess of its market cap. The price shot up but was significantly below the cash coming in from the disposal.

  MDY made it clear that they would distribute most of the proceeds after paying off a small loan. I checked the major shareholder list and found one well known activist with a 29% stake who I felt sure would fight the corner to ensure the distribution, and bought some.

  Sure enough they’ve now announced the distribution – so I get my money back +10% for a 5 month return – but could have sold in the last few days for a 25% gain. And that was buying late with all the information out in the open.

  They will soon delist with a view to selling the last investment some time in the future. Seems to me I should take my money back plus 10% and hold the unlisted shares for a payout some way down the road.

  I hadn’t previously paid much attention to these asset situations – but that experience and your musings on Guinness Peat/ Coats has alerted me to the fact that they do crop up from time to time and actually seem quite safe plays for the patient. (Although it’s less clear how long GPG will play out and it also looks very complicated to analyse).

  Seems you’ve had a very nice return on One Horizon over a short period.

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    Richard Beddard February 28, 2012 at 10:36 am

    Hi Trident. Thanks for your comment. The activist element at MDY Healthcare and Tim’s experience with Invocas is interesting in that it adds an element of security to this kind of situation. Maybe something to look out for.

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  Monevator February 24, 2012 at 10:09 pm

  Yes, it’s a fair cop, hands up — I get scared when a company delists.

  It’s strange, because I sometimes find myself talking about (and I even have a) small investments in unlisted firms, where there is much less transparency than with a delisting firm.

  I think besides liquidity there’s something unsettling about management that chooses to delist. Something in your head wonders “Are they trying to get away from serving shareholders like me?”

  And I think there’s probably something in that, even if often they’re just trying to get away from being *valued cheaply* by such shareholders! (Or perhaps non-shareholders).

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    Richard Beddard February 28, 2012 at 10:28 am

    Hi Monevator. I think its entirely rational to distrust managment in this situations as they have not treated minority shareholders well. As Wexboy says below, I think you can only do this if you think the shares are insanely cheap, to compensate for the fact that management’s motives are pretty much imponderable.

    I’m in that situation with Victoria at the moment (where a boardroom battle has both sides making claims about the other’s impure motives).

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  Tim February 25, 2012 at 10:39 am

  Richard I had a similar experience with Invocas in 2010.

  Luckily shortly before delisting an activist investor bought a substantial stake the share price jumped and I got out at a nice gain (the share was madly undervalued when I bought)

  I held onto a delisted company in the past got a nice dividend and eventually sold you to a large shareholder at an undervalued price.

  It’s great for controlling shareholders to take a company private but I am not sure if I would stay invested again.

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  Wexboy February 27, 2012 at 2:41 pm

  Thanks, Richard! The more I think about it, the more interesting they are – might be worth a post in itself, hmm… A lot of the risks seem overblown to me:

  i) Price – these days, I occasionally come close to the ideal value investor viewpoint that price is not necessarily connected with value at all, it simply offers a chance to sell, or to buy more! – therefore, the absence of a regular traded price shdn’t be much of a concern, and shdn’t really affect your opinion of value at all,
  ii) Liquidity – for most people, does it really matter if 10-20% of your portfolio was in illiquid/delisted stocks – so what?!, and
  iii) Newsflow – at the extreme, with a delisted stock you may literally get an annual report once a year…and that’s it! – is that really a problem, in most instances how much more would you genuinely know about a company with 25 press releases in the year, vs. an annual report?

  However, there are clearly corporate governance risks, and less chance to realize value (or to rely on a catalyst to prompt it either). Then again, plenty of listed stocks present the same issues..! My solution with these type of risks (and I feel resource stocks fall into this basket also), is to limit my portfolio size (generally to 1-2% per stock) and to demand a higher upside potential (so if I was comfortable with say 50% upside on a medium/large cap stock, I’d want at least a 100% on this type of stock). Sometimes this can all line up nicely – because of investor fear/disenchantment/selling, the upside potential on a stock is amplified in the lower price, nicely matching the increased return one might demand..!

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    Richard Beddard February 28, 2012 at 10:31 am

    I think that’s a pretty sane approach! As I replied to Monevator above the cloud the future, as Yoda would say (well, actually he might say “Cloud the future, they do”) so the shares need to be insanely cheap. It’s the ‘panic’ selling element that provides the opportunity.

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