Ideas with Catalysts

[infinitee00]

I would not view case 1 and case 2a as a subset of 2b. In the first two cases you have a tangible event that changes something fundamentally, and the difference between the first two cases is the time-frame and predictability. Fundamental changes are for example corporate actions, news from the company, reported earnings and stuff like that. In case 2b absolutely nothing has to change fundamentally, but the price might be going up every day because of more intangible changes. Call it market perception, sentiment or something along those lines.

 

I agree with the time horizon part as I mentioned in my earlier comment but I think in the case of 2b above, change in market perception is also a tangible event. Just that it happens slowly and is not sharply defined by an event horizon like management buyout or activist getting involved. Moreover 2a is not really predictable, as the investor (barring any powers of clairvoyance) investing today won't be able judge the time frame of the catalytic event.

 

So at the expense of sounding verbose, here is how I see the 3 cases above in terms of Time horizon of catalyst (TH), predictability of catalyst (P) and Tangible catalytic event (TE)

 

1 - apparent catalyst case ------------------------------> TH - Short, P - Yes, TE - Yes and sharp

2a - no apparent catalyst case--------------------------> TH - Unknown, P - unknown, TE - Yes and sharp ( if and when it happens)

2b - "value is it's own catalyst" case----------------------> TH - Unknown, P - unknown, TE - Yes, but slow ( if and when it happens)

 

As you can see from the above, 2b is the just the generic, plain vanilla value investment. 2a is just a special case of 2b with a sharper tangible event.

 

 

PS. you can call it "hope and pray”, but you could put that label on every single investment. You also don't have a guarantee that if BRK would grow IV by 10% every year the next decade that you can see the share price grow at the same rate. Who knows, maybe it will be selling at 0.5x book value.

 

The "hope and pray" term is just something I noted from one of the earlier comments and is not my own. But, I agree with you absolutely! That is why I wrote ( although now I see that it wasn't very apparent from my comment)

 

"(I myself have almost 60-70% of my portfolio in the so-called “hope and pray” category). I know that even though this statement is mostly used for NCAV/net-net type stocks,  anyone buying a low P/E, low P/B or low EV/EBITDA stock is doing exactly the same".

 

Every investment in 2a or 2b category above is exactly that and the default strategy of any value investor (me included). In fact, that is why some investors consider the time taken for value realization as a "risk".

[LC]

This may be slightly off-topic, but as Charlie says, let's invert and see what we find:

 

Disclaimer: This is in no way a criticism, just an observation!

 

We have a 6 page topic entitled, "Ideas with Catalysts".

5 out of 6 pages are discussing the merits of a "Catalyst" and not any actual "Ideas"

This is good and well and I think it is an interesting discussion!

 

But what does this tell us? Why aren't there more "ideas" being posted? Are there not many "Ideas" with a catalyst out there? Why not?

 

Just an observation for thought! Perhaps I am trying to rationalize my own lack of finding any ideas with a catalyst!

[BG2008]

LC,

 

Thanks for steering the ship towards my original intended direction.  I haven't followed Sandridge much, but based on the active nature of the forum, I assume that there's merit that it's undervalued.  It's also interesting to note that the Fairfax managers were all stating the rock formations are favorable and will be worth $20-30 per share in the long run but "they are okay taking a premium to market" now that a bunch of Goldman guys wants to sell the company. 

 

I would argue that sandridge falls in the category of undervalued with an imminent catalyst.  I don't mind folks waxing philosophy on catalyst, I would just encourage those who are interested in identifying ideas with catalysts sharing them here.  There's no doubt that before Joel Greenblatt wrote his book, spin-offs were one of these catalysts that were great to track.

 

 

[infinitee00]

Yes, Thanks LC for being our conscience. I tried alluding to it in my comment but then got carried away myself. I think the reason why these threads go off on a tangent is because the scope of the thread is either unclear or too generic ( as was evident from the discussion above). I understand the limitations of message boards in defining the scope of every discussion but how can one propose investment ideas with catalysts when the definition of catalysts isn't clear enough or cannot be agreed upon by everybody. If you look at the first few messages of this thread ( before the topic started veering off) you will see that quite a few of the ideas mentioned are just undervalued companies. Some hedge funds actively buying shares or trying to get board seats or a new CEO coming on board ( JCP anyone !) may not seem like real catalysts. I am not saying that the ideas are not worthy, in fact some of them are pretty good, but whether they can be included in this thread or not depends on the board member's interpretation of what a catalyst is.

 

For example, can the steps being taken by Stephen Elop in turning around Nokia be termed a catalyst? Can the efforts of activists Starboard fund in ousting the CEO and chairman and clamoring for extra board seats in Tessera technologies (TSRA) be termed as catalysts.  I am sure many on this board will disagree.

 

I have followed EPAX for quite a few years now. I think the business idea of arranging overseas educational trips for students is a novel one and they have some sort of a moat in their partnership with the people to people program, but given their dependence on discretionary income and the state of the economy, their borderline shady and old-school marketing tactics, increased marketing spending per student in the last few years and sequentially declining student participation every year for the last few years, never gave me confidence to pull the trigger ( at least not at the current price). Recently two of their top executives ( CEO and a VP who were also married couples) resigned and an activist has been involved for quite some time. The only thing going for them was their balance sheet, but even that is being slowly eroded ( their cash balance has shrunk by almost 50% in the last 3 years). Nothing that would boost confidence. Now if you look at some of the above statements ( CEO resigning and activist involvement), would you see some catalyst there? I can bet that many people on this board is going to disagree and consider this nothing but a melting ice-cube. The dilemma then is whether to include this idea in this thread or have it added to it's own thread in the investment ideas section. That is a question I am not sure everyone is clear about.

 

Btw, I like GrizzlyRocks suggestion of limiting catalysts to any event that has a high likelihood of narrowing the gap between price and value in the next 12 months.

 

 

 

 

[BG2008]

The purpose of the thread is more to create a list of ideas for us to look further into. 

 

I'll try to more narrowly define catalyst

 

1) IMO, Cheap being its own catalyst is very real when there is a very high FCF yield.  You buy something at 30% FCF yield, it only takes three years before the B/S starts to show people that it's very cheap.  Now, there are companies out there that are clearly cheap based on sum of parts asset valuation.  But, if it does have a high FCF yield, I don't consider there to be an inherent catalyst unless the management team wants to do something or a 3rd party is coming in looking to force an action. 

 

2) Yes, I spoke with someone back in 2011 about TSRA.  I didn't invest back then specifically because of the risk of management team blowing that cash on acquisitions/empire building.  With Starboard breathing over them, TSRA is a much better investment (assuming at the same price)

 

3) I provide some categories of "catalysts", spin-off, re-org, IPO of subsidiaries, activists with track records getting involved, i.e. Baker Street, bankruptcy filing, dividend increases/cuts, divestitures of money losing divisions, new CEO (Harris Interactive - HPOL), large concentrated insider buying across the board (CEO/CFO/sales managers)

 

So, what's a company without a catalyst?  MicroPac is a net-net, makes high reliability components for defense companies, business is not going away or being outsourced. Should be worth 2x.  I flew to Texas, talked to management, the CEO doesn't want to fire himself.  Large shareholder owns 76%.  That's a cheap company without a catalyst.  You know what else is a cheap company without a catalyst?  Patriot transportation, they own a trucking business, aggregate mines (royalty income) and real estate.  A spin or IPO will have 50-70% upside at today's price.  As far as I know, management has no intention to separate the segements so that people can buy a trucking business, a dividend paying MLP, and a REIT. 

 

So, share your ideas with "catalysts" or whatever you want to call it.  Let's define it as 1) Company is cheap and 2) There is an event in the next 12 months that will lead to value realization.   

 

 

[LC]

FIAT

 

There's information on the FIATY thread in the Investment Ideas section, however for simplicity's sake here's the argument:

 

- Undervalued on an earnings basis once Chrysler is considered

- Large holding by the Agnelli family

 

Catalyst: Currently going through the courts to decide on if/how to fully acquire Chrysler. FIAT owns 60%, VEBA owns 40%. FIAT has recently gone through the motions to secure financing for the deal. I am hoping a decision will be made by end of 2013, whether that means buying out VEBA and keeping Chrysler private, or reselling some Chrysler stock in the public markets.

[GrizzlyRock]

Not sure if anyone is interested in mineral resource plays after today or not but one idea with a catalyst is NovaCopper.

 

By my calcs, NCQ is super undervalued yet I don't own any due to a questionable event path.  Tons of hitters here inc Paulson and Klarman. See attached for super quick thesis.

 

Tons of catalysts including a sale here.  If anyone wants to discuss let's take it offline - don't want to jack this thread...

GrizzlyRock_Novacopper_NYSE-NCQ_Super_Quick_Analysis.docx

[krazeenyc]

I do believe that if you invest in severely undervalued companies -- you will do well -- even if there is no apparent catalyst forthcoming . I think value itself is not usually the catalyst, but rather something else/something unforeseen.  Either the business stabilizes, management change, an activist investor shows up, the company is up for sale, etc. But since the company is so undervalued when the catalyst arises your return on your investment is better.  To some degree it is semantics, because I bet someone like Nate will simply say that this "catalyst" occurred because the company was cheap!

 

I think the reason many investors like investing in situations with known catalysts is lack of patience. And the difficulty of figuring out when to sell.

For me personally, over my investing career, while I've done quite nicely, my biggest insecurity is confidence regarding when exactly to sell a position. For example if I  buy XYZ company at $50 a share, and I believe it is worth $150 a share when do I sell? at 150? 140? 130? What if it reaches $150 but I believe it's worth $170 a share at that time? I think investing in ideas with an upcoming catalyst it gives people an answer as to when to sell.

[CorpRaider]

Idea with a catalyst: OXY.  Irani is out and now CEO is free to spin or sell non north american E&P assets.  CEO is slated to exit after 2015.  2 years left to realize the ~$130 per share in value batted around by various and sundry activist investors.

[CorpRaider]

Idea with a catalyst: OXY.  Irani is out and now CEO is free to spin or sell non north american E&P assets.  CEO is slated to exit after 2015.  2 years left to realize the ~$130 per share in value batted around by various and sundry activist investors.

 

Another catalyst: apparently Cramer pumped this idea Friday.  I should probably dump it.  hah.

[nnayyar]

ZNGA - mobile gaming company with some poor acquisitions and exposure to declining Facebook mobile market may find new wind in online gambling. Championed by Chris Christie, NJ posted draft regulation for 60 day comment period. Potential for a quick scalp or perhaps an investment, more info here and a link to the proposed regulations:

 

http://www.osga.com/online_gaming_articles.php?Division-of-Gaming-Enforcement-Announces-Publication-12177#.UbZrxJyPDm6

 

Additionally Jana Partners disclosed a large stake in the company. I haven't gone through the numbers yet but I believe it is trading close at a slight premium to cash after reducing guidance.

[nnayyar]

Trying to resuscitate this thread a bit:

 

1) DGIT, strong cash flow, 2 businesses going in different directions and a bad acquisition have caused the price to go down. Large activists in the name, the largest being Meruelo who upped their stake recently:

http://finance.yahoo.com/news/alex-meruelo-responds-recent-announcements-120000695.html

Clinton group and Michael Murphy are also activist investors with large stakes.

 

2) IMOS, a name I've been following for awhile, simple situation, it trades at a few multiples less the comps that trade overseas. As such, they are listing in their home country Taiwan where the comps have extensive research coverage and investors are more likely to reward company with similar multiples. The listing should occur in the next few months (hopefully) and cause valuation gap to narrow. Also potential new revenue stream when MU/Elpida deal closes.

 

 

 

[greenwave]

Anyone here have an awareness of this company and its prospects ?

 

IDND

 

International Dispensing Corp.

1020 Fifth Avenue

4th Floor

New York, NY 10028

--------------------------

 

Below is a very long awaited news release on some of their recent and longer term history .

 

http://www.idcinnovation.com/why-idc/investors/

 

greenwave