I have finished reading Joel Greenblatt‘s book – You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits. Which I highly recommend.
The main points I got out of the book are:
- Spin-offs are an attractive area to invest in. Investors that receive shares in a spin-off normally do not want to hold them and sell soon after the spin-off. For example an institutional investor may not even be allowed to hold shares below a certain market cap or outside of the S&P500.
- Look for institutional investors that do not want the shares and will sell them immediately, depressing the price.
- Insiders want to buy the shares, look for management making an investment.
- The transaction may unlock hidden value, the business may be able to operate more efficiently after being spun-off from the parent company.
- Holding companies can offer good opportunities. For example a company that holds some listed shares, might trade at a discount. Or at the same value, letting you buy the core business for close to zero.
- Merger securities. Can offer investment opportunities for the same reason as spin-offs. The people receiving the securities do not want them, so look to sell them straight away. Plus always look at the details in the SEC filings.
- Companies coming out of bankruptcy. These may not be looked at by other investors due to lack of coverage or unwillingness to invest in a company that has been bankrupt.
- LEAP options can offer extra upside for investments.
- Options can be useful when investing in spin-off opportunities. Any option that can be exercised after the spin-off entitles the holder to receive a share in both the parent and the spin-off.
- Steal other people’s ideas. Read investment newsletters, read other investors’ annual reports and announcements.
The book has a number of case studies which are useful in understanding each of the concepts and showing that they really do work (or have worked in the past).