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Adding My First Caps Shorts + Class Warfare

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May 16, 2014 – Comments (4) | RELATED TICKERS: IWM , LBTYA , LBTYK

I normally don't short things, I can't stand to root for companies and people to fail, however shorting an index is an entirely different matter.  Doing so might serve as some nice insurance in case we see a sell-off in a particular sector.  A lot of smart money is short the Russell 2000 right now.

Of note, one of the better activist funds that I follow, Starboard Value, currently has an amazing 16.8% of its portfolio in IWM puts. Now that's a huge bet by some very smart people.

Also, the former special situations guru Joel Greenblatt recently made a presentation on the valuation of the markets at the hedge fund SALT Conference. According to Greenblatt, the stock market as a whole is currently in his 44th percentile. That's fairly expensive, but the market has been more expensive than that 56% of the time. The Russell 2000 however is only in his 7th percentile, historically it has been cheaper than it right now 93% of the time.

Good luck finding shares of them to short in real life, but I have decided to add my first and only shorts here in CAPS, Ishares Trust Rus 2000 (IWM) and Direxion Shares ETF Trust Small Cap Bull 3x (TNA).

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Now onto the "Class Warfare" part of the blog title.  You might think that I was going to make some sort of grand political statement.  Nope.  That's not my style (though I do lean towards wanting to help people who are less fortunate than myself) .  What I was referring to is different classes of a company's stock.

Just about every major hedge fund is playing the "Liberty Global is going to be bought out" game. Take a look at this list of whales that are long the stock right now...Berkshire Hathaway, Greenlight Capital, Third Point, Tiger Global, Lone Pine, Blue Ridge, Maverick, Coatue, York, Valinor, Miura, Tiger Consumer, Touradji, White Elm, TigerEye, Weitz. Those are some heavy hitters.

I am personally long Liberty Global, but not the ticker symbol that I see most widely talked about for the company...more on that in a minute. I became interested in the company after reading Philippe Laffont's Ira Sohn Conference Presentation on the company

Laffont believes that the demand for broadband Internet is set to soar in Europe as streaming movie services become more popular there. To illustrate, in the United States nearly 30% of all bandwith is consumed by Netflix.

He expects there to be a significant amount of consolidation in the cable and telecom sector, with Liberty Global being a prime target that might be attractive to Vodafone (VOD), which is flush with cash after selling its stake in Verizon Wireless to Verizon (VZ). Comcast (CMCSA) is also another potential suitor.

Laffont sees Liberty Global's stock price more than doubling from its current $40/share to $90 by 2018.

When looking into this trade though I noticed that many of the big funds that were involved in it had switched their holdings from LBTYA to LBTYK. I wondered why, so I did some research. Here's what I found out. There is three classes of Liberty Global stock, A, B and C shares. The Class A stock has one vote per share, the Class B stock has 10 votes per share and the class C stock has no voting power. Now normally I would be hesitant to give up my rights as a shareholder, as if I'm making a difference with my positions but still it's a matter of principle, but the class C shares historically trade at around a 5% discount. Since we're playing this for the buyout angle, that's another 5% pop in the stock price if Liberty Global gets taken out. I'll take it.

I'd love to hear your comments about these or any other special situation ideas.

Thanks for reading everyone.  Have a great weekend!

Jason

4 Comments – Post Your Own

#1) On May 16, 2014 at 4:56 PM, Mega (99.95) wrote:

Liberty seems expensive to me. Margins are worse than CMCSA, TWC, CHTR, or CVC, yet they trade at a higher price to sales. 

They probably have better growth prospects than US cable companies. But the telecoms are in much stronger position in Europe relative to cable companies, so they can jump straight from DSL to fiber at an even faster pace than Verizon and AT&T.

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#2) On May 16, 2014 at 5:22 PM, Mega (99.95) wrote:

Of note, one of the better activist funds that I follow, Starboard Value, currently has an amazing 16.8% of its portfolio in IWM puts.

Sounds like potential style drift. Do they have any expertise in macro calls? Does an activist fund (which intentionally creates catalysts to reduce market correlation) even need to use hedging?

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#3) On May 18, 2014 at 2:21 PM, Mega (99.95) wrote:

Deej have you ever looked at NRCIA/B? That's a huge potential share class arbitrage.

The ratio between the shares is currently 2.9x but they should trade closer to 6x. I am short NRCIA.

http://seekingalpha.com/article/1533832-huge-share-class-arbitrage-opportunity-in-national-research-corporation-class-b-shares 

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#4) On May 18, 2014 at 9:04 PM, TMFDeej (99.40) wrote:

Hey Mega.  I'm not familiar with it, but the story sounds really interesting. I'm going to check it out. Thanks. 

Jason 

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