Spinoffs: A Quick Summary

June 25, 2008

Below is an excerpt about spinoff investments from Joel Greenblatt’s You Can Be A Stock Market Genius.

1. Spinoffs, in general, beat the market.
2. Picking your spots, within the spinoff universe can result in even better results than the average spinoff.
3. Certain characteristics point to an exceptional spinoff opportunity:

    • Institutions don’t want the spinoff (and not because of the investment merits).
    • Insiders want the spinoff.
    • A previously hidden investment opportunity is uncovered by the spinoff transaction (e.g. a cheap stock, a great business, a leveraged risk/reward situation).

    4. You can locate and analyse spinoff prospects by reading the business press and following up with the SEC filings.
    5. Paying attention to “parents” can pay off handsomely.
    6. Partial spinoffs and rights offerings create unique investment opportunities.
    7. Keep an eye on the insiders.

      This points are useful when looking at investment opportunites like EMC and SATS.


      Magic Formula

      June 23, 2008

      I have posted before about Magic Formula investing, with the help of Digital Look I have prepared a table of magic formula type shares in the UK.

      I ranked companies by their ROCE, then by P/E, then combined the ranks giving a high rank to those with both a high ROCE and a low P/E.

      The top 19 companies are:

      Company ROCE P/E
      Sport Media Group 129.06% 2
      New Star Asset Management Group 290.10% 2.8
      Charlemagne Capital 122.89% 3.3
      Creston 107.44% 3
      Synarbor 84.54% 2.2
      Jacques Vert 108.37% 3.4
      RDF Group 81.49% 2.5
      Garner 483.33% 4.4
      Yell Group 70.85% 2.3
      Belgravium Technologies 125.06% 3.9
      Somero Enterprises (Reg S) 86.60% 3.5
      OPD Group 118.41% 4.1
      Lincat Group 82.95% 3.6
      Litcomp 79.18% 3.6
      Celtic 68.53% 3.2
      Castle Support Services 86.39% 4.1
      Topps Tiles 82.28% 4.6
      Solid State 75.17% 4.4
      Avingtrans 75.09% 4.4

      Good to Great by Jim Collins

      June 16, 2008

      I have just finished reading Good to Great by Jim Collins and was going to post a brief book summary. But a quick search reveals a mindmap of the book and WikiSummaries already has a chapter by chapter summary.

      Seth Klarman at Columbia Business School

      June 16, 2008

      Highlights of Seth Klarman’s speech at the Columbia Business School courtesy of Alex Bossert’s Thoughts on Value Investing.

      Rule #1: Don’t lose money. Rule #2: Never forgot Rule #1.

      Baupost always looks for catalysts in its investments. If you find a stock trading for 50% of what you think it’s worth you want there to be something that will trigger it to reach fair value.

      Baupost will always sell an investment as soon as it near their estimate of fair value.

      Baupost has analysts focused around the type of opportunity; spinoff analyst, index fund deletion analyst, post bankruptcy analyst, distressed debt analyst and an analyst looking at companies that are depressed because of a bad earnings announcement.

      Baupost invests in: Both public and private distressed debt, Real estate (Baupost has done over 200 real estate deals including biding on RTC auctions), U.S. and foreign equities, LBO’s and Derivatives.

      Baupost looks at every merger, rights offering, privatization of government business, spin off, major share repurchase, dutch auction tender, thrift conversions or anything else that could cause mispricings.

      Baupost does best when there is high uncertainty and little information.

      Sometimes the market doesn’t assess risk correctly by relying on volatility (beta).

      Baupost’s three investment principles:

      1. Focus on risk before return.

      2. Focus on absolute returns.

      3. Only focuses on bottom up investing.

      On a side note I have posted a few other times about Seth Klarman and these posts are among the most popular by number of pages views.

      Interesting Links

      June 12, 2008

      Getting To Yes

      June 4, 2008

      Below is a summary of the book Getting to Yes.

      The book talks about principled negotiation. Which is looking for mutual gains and where interests conflict using some fair standard to solve the issue.

      This contrasts with positional bargaining where people bargaining over positions (I offer $10, they want $20, I offer $12 etc), which can create incentives to stall and endangers the relationship.

      Four main steps in using principled negotiation:

      • People: separate the people from the problem.
        • Put yourself in their shoes.
        • One strategy is to listen quietly while they let off steam.
        • Communicating loudly and clearly things the over side wants to hear can be one of the best investment to make in a negotiation.
        • Agreement easier if both sides feel ownership of the ideas.
        • If you want the other side to accept a disagreeable conclusion then involve them from the start => so they feel ownership of the idea.
        • Avoid misunderstanding => interrupt with “Did I understand you correctly that you are saying … “.
        • Note that understanding is not agreeing.
        • Speak about yourself not them => “I feel let down… “.
        • Ben Franklin => asked to borrow a book off an adversary to make them more comfortable.
        • Try to structure negotiation as a side by side exercise.
      • Interests: focus on interests, not positions.
        • Look at underlying positions.
        • Identify interests => ask why, and ask why not.
        • Each negotiator has a constituency to whose interests he is sensitive too.
        • Be hard on the problem, soft on the people.
        • Convert interests into concrete options => if they agrees tomorrow what do I now think I would like them to go along with.
        • Combination of support and attack works best, alone they are likely to be insufficient.
      • Options: generate a variety of possibilities before deciding what to do.
        • A good negotiator is a creative at inventing options.
        • People see their job as narrowing the gap between the positions not broadening the options available.
        • Obstacles stopping people from inventing options: premature judgement, searching for the single answer, assumption of a fixed price, think that ‘solving’ the problem is their problem.
        • To create more options: separate the act of inventing options from judging them, broaden options available rather than look for a single answer, search for mutual gains and invent ways of making their decision easy.
        • Key to wise decision making is selecting from a great number and variety of options.
        • Invent agreements of different strengths => in case you need a weaker version, or can put forward a stronger version depending on the situation.
        • Look for mutual gains, both sides can always be worse off then they are now.
        • Always look for solutions that leave the other side satisfied as well, if the customer feels cheated in a purchase then the store owner has also failed.
        • Making their decision easy => however complex the other side’s decision process is look at it from the view of the person you are dealing with => what would strengthen that person’s hand or help them persuade others to go along.
        • People are strongly influenced by notions of legitimacy, one way to develop solutions easy for the other side to accept is to shape them so they appear legitimate.
        • Making threats is not enough, offers / warnings tend to be more effective.
        • Final test of an option is to write it out as a “yesable” proposition – a draft proposal to which the other side can respond with a single word “yes”.
      • Criteria: insist that result be based on some objective standard.
        • Interesting concept of “one cuts, one chooses” for dividing up an object or entity.
        • Introduction of an objective standard or model to use can lead to the situation where no-one has to back down or appear weak – just reasonable.
        • Negotiating with objective criteria: frame each issue as a joint search for objective criteria, be open to which standards are most appropriate, never yield to pressure only principle.

      But what if:

      • They are more powerful:
        • Protect yourself by setting a bottom line (with some margin of safety) before starting the negotiation.
        • Generate the best possible BANTA: invent a list of actions you could take if no agreement is reached, improve some of the more promising ideas and convert them into practical alternatives, select the best option.
      • They won’t play:
        • Three approaches to focusing their attention on the merits: concentrate on the merits hoping they will then follow your example, focus on what they can do (direct their attention to the merits, do not reject their position, just side step their attack and deflect it against the problem), use a third party to focus the discussion perhaps using the one-text tool.
        • One-text tool is an iterative process where each side can say yes or no part of the agreement one issue at a time, as the plan takes shape each side tends to raise only the issues that are most important.
        • This shifts the game away from positional bargaining as it simplifies the process of both inventing options and deciding jointly on one.

      Here are some useful links to other blog posts that discuss the book: