DEST - Destination Maternity

[Paarslaars]

Of course but without risk there wouldn't be any spread...

 

Any investment has a certain risk, you size accordingly.

[clutch]

Isn't the better lesson that buying merger-arb deals where the business isn't that great is a risky proposition?

 

That is true.

 

Now, one way to think about the current situation - let's say the arb spread included both the uncertainty in the deal and the risk in KAZI.

KAZI has dropped significantly now, yet the current spread is still about the same before the earnings report. A few weeks ago when DEST reported bad results, the spread didn't move much either. So, it seems to me that the spread was really all about the uncertainty in the deal.

 

Accepting this proposition, the investment thesis goes like this - if you assume that there is a high chance that the deal will go through AND KAZI won't drop much further, the current situation looks like a buying opportunity.

[Guest roark33]

who knows what the spread is based on, but you are buying KAZI at a discount, but still buying KAZI, with over 3 months till the deal closes, so if you don't know the business of KAZI, you are just gambling....which is fine for some people. 

[Scuttlebutt Plunger]

who knows what the spread is based on, but you are buying KAZI at a discount, but still buying KAZI, with over 3 months till the deal closes, so if you don't know the business of KAZI, you are just gambling....which is fine for some people.

 

This was a friendly reminder about the difference between investing and speculating.  Been a while since I fell prey to the latter - should have known better to assume you can get the returns without doing the work...

[Hielko]

who knows what the spread is based on, but you are buying KAZI at a discount, but still buying KAZI, with over 3 months till the deal closes, so if you don't know the business of KAZI, you are just gambling....which is fine for some people.

To some extent all investing is gambling.

[writser]

who knows what the spread is based on, but you are buying KAZI at a discount, but still buying KAZI, with over 3 months till the deal closes, so if you don't know the business of KAZI, you are just gambling....which is fine for some people.

 

For 99.99% of all stocks out there going long a 3-month forward at a 30%+ discount is an extremely profitable proposition in the long run. KAZI is not a fraud or a pump & dump and its valuation doesn't look utterly crazy. In such a case I'm happily long the forward. You could define that as gambling and dismiss it instantly but I prefer to think in terms of expected value and I think this is a +EV proposition. Yes, there is some slippage, the ADR might trade at a discount and KAZI might be a terrible retailer but on the flipside you have a huge margin of safety and there is even the possibility that something good happens! I think the latter arguments outweigh the former. Also, when gambling, don't focus on the results .. A month ago KAZI came with very good news and shot up 40% in a few days. Today KAZI came with very bad news and cratered 29%. The former doesn't mean this was a genius idea. The latter doesn't mean this was a terrible idea. It's just variance.

[Green King]

who knows what the spread is based on, but you are buying KAZI at a discount, but still buying KAZI, with over 3 months till the deal closes, so if you don't know the business of KAZI, you are just gambling....which is fine for some people.

 

For 99.99% of all stocks out there going long a 3-month forward at a 30%+ discount is an extremely profitable proposition in the long run. KAZI is not a fraud or a pump & dump and its valuation doesn't look utterly crazy. In such a case I'm happily long the forward. You could define that as gambling and dismiss it instantly but I prefer to think in terms of expected value and I think this is a +EV proposition. Yes, there is some slippage, the ADR might trade at a discount and KAZI might be a terrible retailer but on the flipside you have a huge margin of safety and there is even the possibility that something good happens! I think the latter arguments outweigh the former. Also, when gambling, don't focus on the results .. A month ago KAZI came with very good news and shot up 40% in a few days. Today KAZI came with very bad news and cratered 29%. The former doesn't mean this was a genius idea. The latter doesn't mean this was a terrible idea. It's just variance.

 

How are you valuing this ? I see the call option value of the Entrepreneur operator.  Can't put anything on the businesses. how are you seeing the down side ? i upside looks great. retail is hard.

[clutch]

For those who say the need to valuate KAZI...well, isn't the market valuating KAZI?  ???

 

Say, you have an opportunity to buy a piece of painting in New York for X that you know is being valued at Y in Tokyo. And X is 40% cheaper than Y. Now, I have no idea what the painting is actually worth, but I know what people in Tokyo are saying it is worth. Wouldn't you buy this painting in New York, risk waiting 3 months and sell it in Tokyo? Is this also a form of gambling?

 

I don't think anybody is in this for a long term... Just because you don't invest for long term, it does not mean that you are gambling. Seems like many are boxed into the value investing orthodoxy.

 

[Green King]

For those who say the need to valuate KAZI...well, isn't the market valuating KAZI?  ???

 

Say, you have an opportunity to buy a piece of painting in New York for X that you know is being valued at Y in Tokyo. And X is 40% cheaper than Y. Now, I have no idea what the painting is actually worth, but I know what people in Tokyo are saying it is worth. Wouldn't you buy this painting in New York, risk waiting 3 months and sell it in Tokyo? Is this also a form of gambling?

 

I don't think anybody is in this for a long term... Just because you don't invest for long term, it does not mean that you are gambling. Seems like many are boxed into the value investing orthodoxy.

 

If the market is accurate 100% of the time there is no need for investing. Capital is responsible for price discovery. It is less what is the price more what the price is going to be.

[Jurgis]

I predict that if this thread goes to 50 pages, the return will be bad.

 

8)

[clutch]

For those who say the need to valuate KAZI...well, isn't the market valuating KAZI?  ???

 

Say, you have an opportunity to buy a piece of painting in New York for X that you know is being valued at Y in Tokyo. And X is 40% cheaper than Y. Now, I have no idea what the painting is actually worth, but I know what people in Tokyo are saying it is worth. Wouldn't you buy this painting in New York, risk waiting 3 months and sell it in Tokyo? Is this also a form of gambling?

 

I don't think anybody is in this for a long term... Just because you don't invest for long term, it does not mean that you are gambling. Seems like many are boxed into the value investing orthodoxy.

 

If the market is accurate 100% of the time there is no need for investing. Capital is responsible for price discovery. It is less what is the price more what the price is going to be.

 

EDIT: But in this case it's not about the market being accurate / inaccurate, but more about the discount present in the price.

 

I know all that in theory. To me accepting what market says as the truth and investing on the obvious discount is a much better investing proposition than trying to find out the elusive intrinsic value.

 

The price given by a market is a real measure, although often incorrect. The intrinsic value is a completely conceptual measure that does not exist in reality. It can be "right" in terms of predicting the future price, but it is a very imprecise measure based on a series of speculations you make in your valuation and something that cannot be validated.

 

I know this is not a popular view in value investing because you have to believe in your ability to compute the intrinsic value, and you have to act as if that value is the reality.

 

To me, I'd rather take the proposition when the discount is based on the price that may be incorrect, but at least it is real (in the sense that it is reflected in the market). I'm not suggesting this is better or worse, just my philosophical belief in investing.

 

p.s. I'm still up in this trade by simply trading around the spread ratios.

[Foreign Tuffett]

who knows what the spread is based on, but you are buying KAZI at a discount, but still buying KAZI, with over 3 months till the deal closes, so if you don't know the business of KAZI, you are just gambling....which is fine for some people.

 

For 99.99% of all stocks out there going long a 3-month forward at a 30%+ discount is an extremely profitable proposition in the long run. KAZI is not a fraud or a pump & dump and its valuation doesn't look utterly crazy. In such a case I'm happily long the forward. You could define that as gambling and dismiss it instantly but I prefer to think in terms of expected value and I think this is a +EV proposition. Yes, there is some slippage, the ADR might trade at a discount and KAZI might be a terrible retailer but on the flipside you have a huge margin of safety and there is even the possibility that something good happens! I think the latter arguments outweigh the former. Also, when gambling, don't focus on the results .. A month ago KAZI came with very good news and shot up 40% in a few days. Today KAZI came with very bad news and cratered 29%. The former doesn't mean this was a genius idea. The latter doesn't mean this was a terrible idea. It's just variance.

 

+1 to writser's comment.

 

Even though the outcome, at least thus far, hasn't been kind to many of us, the process wasn't necessarily wrong. Investing, especially in event driven special situations like this, is a probabilistic endeavor. 

 

That said, it is important to size positions like this appropriately. I would never size this like I would a more traditional high conviction long.

[Green King]

Any other industry this will be a good bet. There is two interesting insight here are that retail is in a stage of uncertainty and change and the other being that retail plays are a heavily levered with operating leverage which cuts both ways. I am just having a hard time handicapping the risk and understanding the payoffs.

[Scuttlebutt Plunger]

Merger called off.  Will be interesting to see where DEST trades.  I closed out a few weeks ago - couldn't bear the risk/pain after the recent pullback.

 

http://www.prnewswire.com/news-releases/destination-maternity-and-orchestra-premaman-announce-termination-of-merger-300495680.html

[clutch]

Wow this stinks...  :o

[awindenberger]

Wow this stinks...  :o

 

Boy, now we have to evaluate DEST on its own...

[Guest roark33]

I predict that if this thread goes to 50 pages, the return will be bad.

 

8)

 

Only needed to make it to 10. 

[kab60]

Wow this stinks...  :o

 

Boy, now we have to evaluate DEST on its own...

Or take a hit and move on. Nobody was in this to own a struggling retailer for toddlers. (not saying there's no value here - I have no idea. Just don't get attached to the thing because it's too painful to take the hit. Down 50 pct. is better than down 100 pct.)

[Hielko]

Wow this stinks...  :o

 

Boy, now we have to evaluate DEST on its own...

That sounds like trying to find an excuse not to sell.

[writser]

I sold too. Was on vacation for a few weeks, scaled my investing activities down a bit & not always internet. Tradition holds that that is the time for my portfolio to collapse :) . A few days after the deal failed I spotted my first Destination Maternity store 'in the wild' to rub some salt in the wounds (of course it was completely deserted). No kids but already spent a fortune on baby clothing !!

 

I still don't think this was a terrible idea but it was risky and the end result was a trainwreck. I hope everybody sized accordingly.

[John Hjorth]

... Was on vacation for a few weeks, scaled my investing activities down a bit & not always internet. Tradition holds that that is the time for my portfolio to collapse :) . A few days after the deal failed I spotted my first Destination Maternity store 'in the wild' to rub some salt in the wounds (of course it was completely deserted). No kids but already spent a fortune on baby clothing !!

 

I still don't think this was a terrible idea but it was risky and the end result was a trainwreck. I hope everybody sized accordingly.

 

I'm sorry for your losses, gents,

 

writser, I really admire fellow board members, who can walk away from a loss with good humor. It's certainly not easy.

 

Free advice to you: I think you need to create a new account in your general ledger: "Unforeseen expenses related to going on vacation". Just entry the loss there, so that it'll not have any influence on your track record.

 

Numbers are all about spin [, said the CPA.]

[writser]

Reasonable article pointing out the bull-case for DEST post-merger: link.

[writser]

Destination Maternity Provides Operational Update Following Constructive Stockholder Engagement. Up 50% since last post. I guess there was nobody left to sell.

[writser]

Fun fact: up another ~180% since my previous 'up 50% since last post' post. When people (including me) start ignoring the trainwreck topics the turnaround is usually close. Another example: VRX.

[Hielko]

Or bankruptcy...