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Advice Straight from the Godfather of Special Situations Investing

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December 22, 2010 – Comments (5) | RELATED TICKERS: MCF

 I recently came across an interesting GuruFocus article on Contango Oil & Gas' (MCF) recent spin-off of its CORE gold and rare earth exploration spin-off (CTGO).  The forced selling that the author Canadian Value, who is great BTW, envisioned didn't materialize.  CTGO.OB has soared from $4/share to over $10 over the past five days.  It looks more like a short candidate than a long one at this point.  Nevertheless, the article is a must read because of a supposed transcript of a brief interview that the king of Special Situations, Joel Greenblatt, did on CNBC a number of years ago. I will re-post the text of that portion of the article below:

DAVID: Your book says you can be a stock market genius, even if you’re not too smart. What are some of the tricks here that–that–that allow you these kind of astronomical returns?

Mr. GREENBLATT: Well, I think to do it the way everyone else does it every year, 80 percent of the mutual fund managers who do a lot of work, can’t seem to beat the market, you have to take maybe a little different angle. And the way I look at things is if you’re looking in places that other people aren’t, you have a much better chance of beating the market.

DAVID: And these are what you call pockets of opportunity’?

Mr. GREENBLATT: Right. There are some areas of the market where, on average, those areas beat the market just randomly selecting those areas.

DAVID: Let’s talk about spin-off securities, which is one of these pockets. T–tell us about spin-offs–I–the one I talked to you about before we went on the air, that I thought of, was Lucent Technologies–is that an example, wh–when it was spun off by AT&T?

Mr. GREENBLATT: Sure. AT&T actually had two spin-offs last year: One was Lucent Technologies and one was NCR. The one that I purchased was NCR. What happens is, is that–NCR’s a computer company, was a division of AT&T, a telephone company. And to separate itself–this small division from the company–they would distribute shares–AT&T distributed shares to its shareholders in NCR. They weren’t purchased. Just if you owned AT&T shares, you would get a distribution of NCR shares. What happens to these shares is that people who get them sell them off.

DAVID: Mm-hmm.

Mr. GREENBLATT: They bought AT&T–they bought a telephone company. They’re not interested in a computer company that AT&T lost $ 7 billion in in the last six years.

DAVID: Well, they sell them off, though, doesn’t the price go down?

Mr. GREENBLATT: The price–that’s exactly why there’s an opportunity. The people who get the stock don’t want it…

DAVID: Mm-hmm.

Mr. GREENBLATT: …they sell it. You get an initial low price, and w–on average–there was a 30-year study that showed that spin-offs beat the market by 10 percent a year just on average.

DAVID: Got a minute, so we’ll have to split it up. But the other pockets of opportunity–merger securities is another one. Give me an example.

Mr. GREENBLATT: Well, when Viacom purchased Paramount, they purchased it with cash, they purchased it with stock and they purchased it with four other securities–warrants, convertible debentures, things of that nature. If you own stock in Paramount and–and Viacom bought it, you would get stock, you’d get cash and maybe you’d keep those things. But if you get all these securities that you’ve never even heard of, you just sell them off. And there’s an–another opportunity to have extraordinary gains in that area.

DAVID: How do I turn somebody else’s misfortune into my fortune with bankruptcies?

Mr. GREENBLATT: Well, what’s interesting is, in bankruptcies, you don’t really invest in stocks after they go bankrupt, but what you can do is–the way stocks come out of bankruptcy is that they give their creditors, like a bank or a–a–a supplier, stock in the company…

DAVID: Mm-hmm.

Mr. GREENBLATT: …so that they can come out–because they can’t pay off the debt…

DAVID: Right.

Mr. GREENBLATT: …because they don’t have the cash. So these suppliers and banks get stock in a company that they had no interest in getting.

DAVID: Right.

Mr. GREENBLATT: They sell it right off. It’s the same exact opportunity as in spin-offs and merger securities.

DAVID: It’s all in here, “You Can Be a Stock Market Genius, Even If You’re Not So Smart.” Our thanks to Joel Greenblatt, author of “You Can Be a Stock Market Genius.”

Upcoming Contango Spinoff Of CORE Unit Seems Destined To Create Forced Selling – Will It Be A Good Investment Opportunity ?

Deej

5 Comments – Post Your Own

#1) On December 22, 2010 at 12:11 PM, portefeuille (99.66) wrote:

the author Canadian Value

http://caps.fool.com/player/swizzled.aspx

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#2) On December 22, 2010 at 12:56 PM, Bays (29.97) wrote:

He is definitely an investing legend.  Greenblatt's returns were astronomical!

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#3) On December 22, 2010 at 9:59 PM, Bays (29.97) wrote:

Deej,

Get rid of these damn spammers!

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#4) On January 03, 2011 at 6:57 PM, Valyooo (99.47) wrote:

Do you have any other books than You can be a stock market genius, for special situations? I loved that book.

BTW, I see you are very bullish on corn...do you have any articles discussing why?

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