Returns from Special Situation trades

[oplia]

Returns from special situations trades are binary by nature and if you choose to participate only in couple of deals in a year, you might get burned very badly.

However, participating in these types of trades regularly seems to really pay-off well.

 

I have compiled some stats for 2018 on the 96 special situation ideas that have been posted by myself and members and on average these have generated 40% IRR.

 

For more details see here:

https://www.specialsituationinvestments.com/2019/01/2018-year-in-review/

 

[stahleyp]

Why does almost every post you make advertise your website?

[EricSchleien]

Why does almost every post you make advertise your website?

 

Because he wants to get the word out to people where he feels he can add value & in a community of people who are more prone to be interested in these kinds of situations.

 

That's just my hunch anyway :)

[JayGatsby]

I joined this site for a bit, but didn't like the structure.

 

When I joined it was advertised as a free community as long as you submitted ideas. If you didn't submit ideas you would be charged. Fair enough.

 

By month 2 I was submitting ideas AND being charged.

 

When I joined I had a lot more time and was researching these sorts of trades fairly actively. The ideas that are posted still require your own due diligence, and the whole site requires an active member base to make it worthwhile.

 

So if you're an active, contributing member of the community you pay to build a product that one person then turns around and sells to noncontributing members.

 

Seems like a community of people actively researching special situations trades together would be valuable enough without one person trying to sell those ideas for profit.

 

I guess that's why CoBF has stuck around.

[writser]

Why does almost every post you make advertise your website?

 

Because he wants to get the word out to people where he feels he can add value & in a community of people who are more prone to be interested in these kinds of situations.

 

That's just my hunch anyway :)

 

If you want to add value to a community here's an idea: share your ideas for free. Don't copy them from places such as this forum, put them behind a paywall and then spam your website here to try and get people to pay for it. You also run a podcast that you refer to every other post so obviously you are inclined to defend others who are doing the same. At least your podcast is free ..

[oplia]

wow, so much negativity.

 

I believed I had compiled some interesting info on pay-offs from special situation plays and shared it here. Post was/is freely accessible to anyone with no ads or encouragement to join the site. Since when is it considered wrong to post a link with potentially interesting info to your own site?

 

Stahleyp - my last couple of posts on CoB related to contest that I was running on the site and where I paid out to the winners disregarding whether they were members or not. Again, not sure why would it be not relevant to CoB readers.

 

JayGatsby - sorry to hear you were disappointing by the experience. If you believe you were being charged where you were not supposed to, please get in touch with me and I will be more than happy to sort it out. Own due diligence is definitely required on all the ideas posted and same should apply to any site.

 

Writser - not entirely sure what are you talking about. I do not have a podcast and do not believe I have copied a single idea from CoB. Any examples?

[LC]

This is just my 2 cents:

 

I've got no horse in this race but, there have always been these special situation newsletters/blogs/etc.

 

As oplia correctly mentions, your own due diligence is required no matter where you source your ideas - whether it be COBF, VIC, your best friend's mother-in-law, etc.

 

So I never joined these special situation blogs because, why not just set up a tracker for 10-12 (spinoffs)/13E3 (going private)/SC-TO (tender offer) filings from EDGAR?

 

You're doing the DD anyways. But I can understand if your time is worth paying $XX to have it pre-sorted for you.

 

I think this website does a good job policing the advertisement / promotion stuff. I think Nate does it best - he offers a service, mentions it sometimes, but is also a regular contributor. Actually if there was one newsletter I would subscribe, it would be Nate's, because of the fact that he is a regular contributor.

[Parsad]

Returns from special situations trades are binary by nature and if you choose to participate only in couple of deals in a year, you might get burned very badly.

However, participating in these types of trades regularly seems to really pay-off well.

 

I have compiled some stats for 2018 on the 96 special situation ideas that have been posted by myself and members and on average these have generated 40% IRR.

 

For more details see here:

https://www.specialsituationinvestments.com/2019/01/2018-year-in-review/

 

 

Hi Oplia,

 

I've received a number of complaints about this post being advertising.  I'm ok with the occasional reference from posters to their own sites, so I won't remove this.  But if it becomes recurring, you will be banned without notice.  Just a heads up on how we really don't have any advertising on here, other than the three Google Ads that show up to keep the lights on.  Cheers!

[JayGatsby]

So I never joined these special situation blogs because, why not just set up a tracker for 10-12 (spinoffs)/13E3 (going private)/SC-TO (tender offer) filings from EDGAR?

 

You're doing the DD anyways. But I can understand if your time is worth paying $XX to have it pre-sorted for you.

 

I set up a ton of those alerts at one point and still missed a lot. There's a ton of time involved in researching them correctly, so unless you're focused full time on it it's hard to do it yourself. I actually think a semi private group of people focused on these sort of things could be hugely valuable to all involved. CoBF is amazing, but some situations you don't really want to post publicly on the internet. Writser does an awesome job of posting quality ideas here and getting feedback, but one off special situations don't usually generate a ton of interest unless he posts them.

 

If there was interest in that sort of thing I'd happily join and hopefully pull my weight (if not I'd be voted out lol). I think everyone realizes the weaknesses of the paywall / one person sells access model, so no point belaboring that.

[fishwithwings]

A little off topic, but how do you guys source your Special Situations ideas?

[LC]

A little off topic, but how do you guys source your Special Situations ideas?

 

I do what my previous post mentioned: set up a RSS feed for 10-12 (spinoffs)/13E3 (going private)/SC-TO (tender offer) filings from EDGAR. You can also set up google news alerts for things like "spinoff".

 

As JayGatsby rightly points out, there is a learning curve to make sure you don't miss potential special situations.

 

Personally I look for a more hands-off approach so I don't invest in special situations anymore.

[BG2008]

A little off topic, but how do you guys source your Special Situations ideas?

 

I do what my previous post mentioned: set up a RSS feed for 10-12 (spinoffs)/13E3 (going private)/SC-TO (tender offer) filings from EDGAR. You can also set up google news alerts for things like "spinoff".

 

As JayGatsby rightly points out, there is a learning curve to make sure you don't miss potential special situations.

 

Personally I look for a more hands-off approach so I don't invest in special situations anymore.

 

I have evolved this way as well.  I think it makes sense if you have a few analysts.  If you are a long term buy and hold.  By the time an event happens, you might have missed a 10 year 5 bagger.  I prefer to own the latter now because it is more tax efficient and allows me the luxury to develop my skillsets. 

[oddballstocks]

A little off topic, but how do you guys source your Special Situations ideas?

 

I do what my previous post mentioned: set up a RSS feed for 10-12 (spinoffs)/13E3 (going private)/SC-TO (tender offer) filings from EDGAR. You can also set up google news alerts for things like "spinoff".

 

As JayGatsby rightly points out, there is a learning curve to make sure you don't miss potential special situations.

 

Personally I look for a more hands-off approach so I don't invest in special situations anymore.

 

I have a similar answer.  I had a ton of RSS feeds from EDGAR, would be trawling through them daily.  The problem was I'd occasionally miss good things, and I wasted a LOT of time on weird stuff trying to find some edge.  The odd lot trade was awesome until it wasn't.  Spin-offs were awesome until they weren't.  Split-outs were awesome until they weren't...

 

Originally you could be terrible with timing and it'd work out.  You purchased some spin, sat then sold for a 35% gain.  Then the spins became garbage and you could do ok if you sat at the terminal and waited for a good print, then sat and waited for a good exit point.  It became too involved, I'd be trying to watch trading blocks to estimate when selling pressure was done, or if there'd be buying support.

 

Instead of a rich playing field too many of these became "look at the gain if you purchased at 2:37pm on Thursday the 5th and sold at 9:48am six months, two weeks and four days later. Otherwise you lost money."

 

I have this view that value investing is like pools of oil, you suck a pool dry and move on.  The trick is in most cases the pool isn't dry, it's just harder to get what's in there.  So eventually it makes sense to go back to the old pools, but you have to work harder than before.

[spartansaver]

A little off topic, but how do you guys source your Special Situations ideas?

 

I do what my previous post mentioned: set up a RSS feed for 10-12 (spinoffs)/13E3 (going private)/SC-TO (tender offer) filings from EDGAR. You can also set up google news alerts for things like "spinoff".

 

As JayGatsby rightly points out, there is a learning curve to make sure you don't miss potential special situations.

 

Personally I look for a more hands-off approach so I don't invest in special situations anymore.

 

I have a similar answer.  I had a ton of RSS feeds from EDGAR, would be trawling through them daily.  The problem was I'd occasionally miss good things, and I wasted a LOT of time on weird stuff trying to find some edge.  The odd lot trade was awesome until it wasn't.  Spin-offs were awesome until they weren't.  Split-outs were awesome until they weren't...

 

Originally you could be terrible with timing and it'd work out.  You purchased some spin, sat then sold for a 35% gain.  Then the spins became garbage and you could do ok if you sat at the terminal and waited for a good print, then sat and waited for a good exit point.  It became too involved, I'd be trying to watch trading blocks to estimate when selling pressure was done, or if there'd be buying support.

 

Instead of a rich playing field too many of these became "look at the gain if you purchased at 2:37pm on Thursday the 5th and sold at 9:48am six months, two weeks and four days later. Otherwise you lost money."

 

I have this view that value investing is like pools of oil, you suck a pool dry and move on.  The trick is in most cases the pool isn't dry, it's just harder to get what's in there.  So eventually it makes sense to go back to the old pools, but you have to work harder than before.

 

Oddball, you said you "had" feeds and whatnot. What have you transitioned to?

 

I've been working on studying ideas that worked out, then attempting to reverse engineer how I might have found them in a more efficient manner. I think I am making a little headway, but I am still very early in this process.

[porcupine]

I have bookmarked spinoffs, tender offers, and going private offers on edgarpro and check in roughly 3 or 4 times during the week for interesting situations. Here they are if you want to bookmark them yourself:

 

Tender Offers:

https://pro.edgar-online.com/ExpandedSearch.aspx?site=0acade95-c20b-4c47-bebb-1dca89f15ab1&FormTypeID=670%7c671%7c343%7c344%7c347%7c348%7c349%7c351%7c350%7c354%7c784%7c355%7c356%7c357%7c358%7c634%7c635%7c636%7c637%7c359%7c727%7c638%7c639&from=all&searchtypeid=1

 

Spinoffs (note... Form 10s aren't exclusive to spinoffs):

https://pro.edgar-online.com/ExpandedSearch.aspx?site=0acade95-c20b-4c47-bebb-1dca89f15ab1&FormTypeID=813%7c851%7c751%7c1%7c2%7c852&from=all&searchtypeid=1

 

Going Private:

https://pro.edgar-online.com/ExpandedSearch.aspx?site=0acade95-c20b-4c47-bebb-1dca89f15ab1&FormTypeID=341%7c342&from=all&searchtypeid=1

 

[oddballstocks]

A little off topic, but how do you guys source your Special Situations ideas?

 

I do what my previous post mentioned: set up a RSS feed for 10-12 (spinoffs)/13E3 (going private)/SC-TO (tender offer) filings from EDGAR. You can also set up google news alerts for things like "spinoff".

 

As JayGatsby rightly points out, there is a learning curve to make sure you don't miss potential special situations.

 

Personally I look for a more hands-off approach so I don't invest in special situations anymore.

 

I have a similar answer.  I had a ton of RSS feeds from EDGAR, would be trawling through them daily.  The problem was I'd occasionally miss good things, and I wasted a LOT of time on weird stuff trying to find some edge.  The odd lot trade was awesome until it wasn't.  Spin-offs were awesome until they weren't.  Split-outs were awesome until they weren't...

 

Originally you could be terrible with timing and it'd work out.  You purchased some spin, sat then sold for a 35% gain.  Then the spins became garbage and you could do ok if you sat at the terminal and waited for a good print, then sat and waited for a good exit point.  It became too involved, I'd be trying to watch trading blocks to estimate when selling pressure was done, or if there'd be buying support.

 

Instead of a rich playing field too many of these became "look at the gain if you purchased at 2:37pm on Thursday the 5th and sold at 9:48am six months, two weeks and four days later. Otherwise you lost money."

 

I have this view that value investing is like pools of oil, you suck a pool dry and move on.  The trick is in most cases the pool isn't dry, it's just harder to get what's in there.  So eventually it makes sense to go back to the old pools, but you have to work harder than before.

 

Oddball, you said you "had" feeds and whatnot. What have you transitioned to?

 

I've been working on studying ideas that worked out, then attempting to reverse engineer how I might have found them in a more efficient manner. I think I am making a little headway, but I am still very early in this process.

 

For hard to get stuff I purchased shares to get reports in the mail.  That's an edge you can't get online.

 

I also started to do a lot of manual work, would look at sites that you couldn't scrape daily for changes.  I used changedetector for a while too.

 

In some ways I just moved to different markets.  On an odd-lot you could make a grand at most except in very rare cases.  Now I'll trawl around, buy broken electronics, fix them and resell them, about the same margin.  I've done the same with weird and rare toys, find sellers who don't know the value and resell to collectors.  Margins and gains are very similar to odd lots, and it's a lot more fun.  In my office I have a stack of routers that were sold to me for $100 apiece that were "dead".  I fixed them and am currently unloading at $300-500 apiece.  Just like an odd lot, keeps me busy.

[oddballstocks]

I guess the other thing on these special situations was I started to calculate the gain per hour spent researching.  This metric moved me away from them quickly.

 

You spend five hours looking at an odd lot tender that nets you $500, so $100/hr.  But to get that $500 you need to invest $6,250.  Alternatively you can invest $6,250 in some company that has the potential to appreciate 50% and pays a 3% dividend over two years.  So you get $375 in dividends and $3,125 in gains.  Maybe it takes 20 hours to research said company, that's $175 an hour.  But the math is skewed because in the odd lot you're limited to $500 structurally, whereas you can invest $12,500 and double your hourly rate, or invest $62,500 and 10x your hourly rate.

 

The best special situations (which aren't around anymore) were ones were you could invest in a scalable way and still scalp the 8-10% return.

 

Although at that point you're now competing with well funded professionals for the same positions.

 

It's a game of diminishing returns.

 

The best special situations are the ones that appear during a financial crisis or after when there isn't much liquidity.  I'll be looking for them again once we hit a crash, which probably won't be for another 30 years...ha!

[Rod]

I've found I can do really well with special situations when I invent my own. Instead of looking at the same spinoffs everyone else is looking at I create my own "patterns". I've come up with about a dozen or so. For some of them I might be the only guy doing it. You can figure out some ideas yourself that you can apply to small, weird, and illiquid stuff. And it can work at pretty good scale for an individual investor. After all, someone had to come up with the spinoff idea. There are other ideas you can discover. It works in Canada anyway.

[fishwithwings]

I've found I can do really well with special situations when I invent my own. Instead of looking at the same spinoffs everyone else is looking at I create my own "patterns". I've come up with about a dozen or so. For some of them I might be the only guy doing it. You can figure out some ideas yourself that you can apply to small, weird, and illiquid stuff. And it can work at pretty good scale for an individual investor. After all, someone had to come up with the spinoff idea. There are other ideas you can discover. It works in Canada anyway.

 

Do you mind giving some examples?

[Rod]

I've found I can do really well with special situations when I invent my own. Instead of looking at the same spinoffs everyone else is looking at I create my own "patterns". I've come up with about a dozen or so. For some of them I might be the only guy doing it. You can figure out some ideas yourself that you can apply to small, weird, and illiquid stuff. And it can work at pretty good scale for an individual investor. After all, someone had to come up with the spinoff idea. There are other ideas you can discover. It works in Canada anyway.

 

Do you mind giving some examples?

 

One pattern I've used recently is something I call "Illiquid Arbitrage Pairs". Sometimes you can find two stocks that are economically equivalent and so should trade in tandem. Usually some computer arb will be at work trading these so there is no opportunity. But if one of them is extremely illiquid, the arbs don't get involved. I have one pair like this I follow and own because I think it's worth holding in it's own right, but once a year or so I get the chance to swap between them because they diverge and I can add about 10 extra percentage points to my return. I easily make 20 to 30% annually with this. And it can absorb a few hundred thousand dollars.

 

A few years ago there was a private golf club in Toronto where you could buy a membership for $10k while the land value per member was over $100k. The club ended up selling out to a developer. The pattern here is that cooperatively owned assets are sometimes mispriced. I look at every co-op situation I can find.

 

Another good pattern is extreme leverage. I mean 10 to 1 or more. The idea here is that when leverage is high enough the debt holder is starting to share in your downside, but they never share in the upside. The debt needs to be non-recourse, have a reasonable interest rate, and have at least a couple years left before maturity. The more volatile the asset the better. I know some people have talked about his idea here, but there are so many unique ways to apply it. I've found one in the stock market that I am not going to reveal because even if a few people started doing it the opportunity would disappear.

 

There are many, many different patterns you can come up with if you are a little creative.

 

[alwaysinvert]

My experience with spinoffs is that you need some kind of wrinkle, preferrably some mechanical aspect, that makes the mispricing. I seldom see a straight spinoff having some obviously mispriced parts these days. From large caps they are almost uniformly garbage.

 

You've got to 1. think about the timing in a manner that is contrarian - buying in before or after, selling and buying the correct ones after the spin 2. find some kind of mechanical edge (i.e. predict the selling and buying pressure).

 

The exercise is inherently a bit speculative because you also think about how the market will price the pieces. Is one a story stock? Will one pay large dividends and what kind of yield is reasonable for that stock? And so on. But I have found it valuable to watch for these situations where the lens through which the market views the companies might change for one reason or another (not only in relation to spinoffs, but also more generally). At the very least that gives you some nice extra optionality if you also happen to like the case on a fundamental basis.

 

As for other special sits, I like to look at situations that are "between buckets". They can't fit neatly into just one category, so pure arbers won't do it and long-only players won't bother or even sometimes can't. For one of these already played out cases you can read the RADH thread. Of course, it also helps to have some kind of local knowledge or special insight. Pure merger arbs are almost always too tightly spread to do without very heavy leverage and major diversification.

 

Another play which the "illiquid arbitrage pairs" reminded me of is either peers arbs between countries (could be fruitful but fraught with complications, obv) or between "undiscovered" peers, which I would call companies that are more similar than the market pricing currently recognizes. This could be because one is illiquid and one is not or that there are severe accounting differences but less underlying business differences. I don't bet on mean reversion between these as that may never happen, I only look to long the cheaper one.

 

Finally there is the "read between the lines" corporate events. I'm not sure I need to explain these in great detail - it's about making some qualified guesses based on the "umms" and "ahhs" or general hints by owners or management. My track record has been mixed with these in spite of most often being generally correct on the direction. The main thing to look out for, as long as your interpretation is correct, is extended timeline and/or business deterioration risks.

[writser]

Good post above.

 

I think there are still some good opportunities out there but you have to put in the time and effort. Searching EDGAR for 'odd lot' every once in a while is not that and if you think you can easily beat the market by running some EDGAR searches a few times a week I think you are being optimistic. Same for buying a spinoff the day after and selling it a year later. Maybe such 'easy tricks' worked a few decades ago but not anymore (and I have my doubts about whether it was so easy back in the days). Most opportunities involve more analysis than skimming through a filing, timely analysis, diligently monitoring the trade ticker, patience and have a wide range of outcomes. And perhaps more importantly, they involve pain and uncertainty (hence the opportunity - the market pays you to feel like shit because other market participants don't want to). As Alwaysinvert mentions the clear-cut cases are seldomly priced attractive.

 

All in all, as others pointed out, unless you have the time to spend a few hours every day sifting through boatloads of news and monitoring countless quotes you might be better off buying some value stocks instead. Actually I'd say you are probably better off buying an index fund but that's not something visitors of this forum want to hear. And even if you have the luxury of so much spare time there are the questions of 1) are you nerd enough to actually enjoy the process 2) don't you have something better / more fun to do 3) is your portfolio large enough to make it worth your while on an hourly basis and 4) is your portfolio small enough that you can deploy significant amounts when small pockets of inefficiency appear. Something between $1m and $10m is probably the sweet spot. With $100k you are better off refurbishing routers and with $100m a lot of opportunities are simply too small.

[scorpioncapital]

My rule is only do arbitrage, special situations if you would own the companies even without the deal because you like the business or company. Don't have to like it alot but enough to say it's something I'd own anyway without the deal.

 

That way there is less disappointment if something goes wrong.

 

[5xEBITDA]

My rule is only do arbitrage, special situations if you would own the companies even without the deal because you like the business or company. Don't have to like it alot but enough to say it's something I'd own anyway without the deal.

 

That way there is less disappointment if something goes wrong.

 

This is great advice, and in fact you can take it a step further by saying don't invest in any business unless you'd be ok owning it if you were to get stuck with it for years.

[Hielko]

I think it’s terrible advice for special situations. Your buying them for the specific situation, not for the long run. If the situation is attractive it’s worth investing, it’s as simple as that.