Earlier in the yer, I posted my semiannual results, so with the year over, I thought I’d post my annual results today.
Before I do, however, I need to post a giant asterisk. I discussed my investment in two stocks, Cagles and First Bank of Delaware (FBOD), that turned into liquidating trusts and receive zero value from my broker (etrade). There’s no question that both of these will pay out at some point in 2013, but the exact date and timing is certainly in question. With that in mind, I’m posting a table below that shows my results depending on what value you give the Cagle’s and FBOD. (note- the top left is the value assuming a zero for both positions, which I think would be ridiculous but you’re free to assume that).
I’ve bolded the level that I think the shares would be worth if they traded today ($3.20 for Cagle’s and $1.15 for FBOD, roughly consistent with where they were trading before ceasing), though I think the ultimate pay out for both should be a nice bit higher.
So obviously it’s been a pretty nice year. But it could’ve been a much better year without some “unforced” errors. With that in mind, I wanted to go through my biggest losers of the year. I think there’s a consistent theme running throughout that can be picked up on pretty quickly.
1- First Bank of Delaware- Already mentioned above, but this was by far my biggest loser. I started investing when they announced their sale / liquidation and were still trading at a huge discount to book.
2- ALJJ- recently mentioned here, I started investing in ALJJ because of a widespread between a tender price and their stock price. Long story short, the merger is still on holding pending financing, and the huge position I took is down pretty significantly (though it’s recovered in the past few days).
3- SPCO- again, recently mentioned here, I built up a position once the founder died and it seemed to me the company would be sold. Results have continued to be disastrous, and there’s no news on a potential sale or anything.
So what do all of these have in common?
I saw a stock trading at a discount to payout value with a clear catalyst and no real market correlation, and I got way to aggressive with all of them. In SPCO’s case, I don’t mind investing in crappy businesses trading for less than book, but I took SPCO way past what I would normally do because I thought it would be sold soon. In FBOD and ALJJ, I saw a nice arbitrage opp and completely ignored the downside while taking the position well past a normal special situation size.
(Side note- I still think a larger than normal investment was warranted in ALJJ’s case, as I still can’t believe the merger isn’t going through. FBOD was a complete mistake to let it get that big).
So I’ve clearly been letting special situations get the best of me. While I’m still going to be looking for them in the New Year, I’m going to be paying much better attention to position sizing and focusing on downside risk.
In a post later this week, I’m going to reveal my top three or five positions heading into the New Year.
Disclosure- Long FBOD, Cagle, ALJJ, and SPCO
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just wondering, for you, what is a large position as % of portfolio(rough estimate)…I know for me it’s 10% or greater, but for some more diversified people it’s 5%,etc.
If you’re looking for another special sit / risk arb opportunity, check out ShangPharma (SHP). Being acquired by Founder and a legit American private equity firm. Vote is already completely locked-up because Founder owns ~55% and PE firm owns ~12%, so the 67% threshold has already been met to squeeze-out the minority public shareholders. The buy-out requires $57m of equity (33% of $173m market cap) and HSBC has provided $60m of financing at highly attractive rates (L+425) — this is literally a “free” take-private for the Founder and PE firm.
Even if the financing markets gets dicey, the Company has ~$35m of cash sitting on its books, so it only needs ~$22m of cash to buy-out the public shareholders.
Reason why the opportunity exists is due to the tinge of the Chinese reverse-IPO frauds and questions around the legitimacy of these companies’ financials. Clearly this isn’t the case here since (1) the private equity firm knows it’s not (it has been partnered with the Founder since 2007 and took it public in 2010… it’s now probably going to rinse-and-repeat and IPO in Hong Kong where people won’t ipso facto assume its a fraud) and (2) HSBC has signed letters to provide $60m of financing, so they’ve obviously already done their diligence.
Deal probably takes 4-6 months to close given legal hoops to close out the Cayman entity / ADR, so you’re looking at a nice 9-14% annualized return at $8.60/sh today.
Tbone Sam–do you have a list of other similar deals, meaning all-cash, take private deals of US-listed Chinese cos by their founders that are set to close within the next twelve months? Thanks, Greg
Sorry G2, I haven’t compiled a list. The only other two that come to mind are the ones everybody else reads about — Focus Media and Fushi Copperweld (which upon further review just closed). Clearly a lot of these US-listed Chinese companies have proven to be frauds, so you’d want to do your diligence on each of them before investing. SHP just seems like the baby that got thrown out with the bathwater. Sucks for the IPO investors 24 months ago who invested at $15/sh.
Maybe try doing a screen on FinViz for Chinese based companies listed on NYSE/NASDAQ, then do some Googling & EDGAR searches.
Two things to watch out for are (1) Chinese IPOs that went through the “standard” underwriting IPO process are significantly less likely to be frauds (as opposed to the reverse IPO through a US-shell); (2) the same cast of US fraudsters and respective auditor firms are behind a number of the frauds.
Btw, it looks like some dude on Seeking Alpha (“Markus Aarnio”) dug this one up on SHP along with a few other companies about 6 months ago, so maybe he has more on this kind of thing.
TboneSam,
Do you have to do anything, i.e. tender, or is it just buy it and let the process run its course?
Thanks,
Tim
Nope, don’t need to do anything — no need to tender, just wait until the deal closes and your ADR shares will be cancelled and you’ll receive the cash proceeds in your brokerage account. Your broker will send you the merger proxy so that you can choose to vote for / against the deal, but practically speaking, you don’t need to even vote since the Founder + PE firm already have ~67% of the shares so they already meet the % required to do the take-private (nevermind the fact that you probably wouldn’t be buying a meaningful enough # of shares to impact the deal anyways).
just curious what you use to track your results… i assume just an excel spread sheet? i’m still playing around with the best way to track dividends, realized profit, cash, etc all in accordance with GIPS with the minimum amount of effort needed. if you have a system that works well i’d be curious
Great result for 2012. Fingers crossed that this year will be just as good. Looking forward to reading about your top picks going into ’13