Special Situation Investing News - 8/14/2012
Man I figured that I'd crank out one of these updates every couple of days, but there's been so much cool news out there that I had to post it. I don't know whether I have gotten better at finding it or if there has just been a large number of special situations lately. Perhaps a little bit of both, which is funny considering that many people currently consider special situation investing out of fashion. All the better for us.
1) After successful activist adventures in Marathon Petroleum and McGraw-Hill the busy Jana Partners is at it again, this time agitating for change at fertilizer producer and retailer Agrium (AGU).
Jana has been encouraging Agrium to spin-off its business that supplies fertilizer and seeds to farmers in North America under the assumption that the market is undervaluing the operations and that they might be a buyout candidate if they were an independent company. Jana is also after AGU to cut expenses and increase share buybacks.
I like the potential moves and while Agrium seems to be resisting for now Jana has been very successful in the past. I need to take a very close look at this one. It has a number of the attributes that I like, it pays a dividend, the company makes "stuff," and there is a potential catalyst. Of course one could argue, and rightfully so, that the stuff that AGU makes is highly commoditized. Very true. That combined with the fact that I already own a ton of another fertilizer producer, CVR Partners (UAN), might keep me watching this one for a little while rather than jumping right in with real money. I did add it in CAPS today though.
Hedge Fund Jana Partners Sets Sights on Canadian Prey
2) C&J Energy Services (CJES) has been delivering outstanding growth, has very little debt, has interesting international expansion opportunities and it is trading for only 5 times earnings.
So why is it so cheap? Because the market hates the uncertainty surrounding fracking. This is a bet that fracking is here to stay. If so, CJES should do tremendously well over the next several years. This one is also tempting, but given my extreme exposure to fracking through my decent sized position in Hechmann (HEK), I'll probably pass on this one as well. Not here in CAPS through where portfolio management isn't as important.
The Extreme Relative Value Of C&J Energy Services
3) I typically don't like shorting companies because I don't like rooting for companies to do poorly and likely in turn people to lose their jobs. Heck, it even feels strange switching the CAPS rater from "optperform" to "underperform." However, this is a somewhat special situation (surprise, surprise, that is my thing after all).
Whiting USA Trust I (WHX) is actually the second trust that I have shorted here in CAPS, the other being Great Northern Iron Ore Properties (GNI). So far that one has yielded over 20 CAPS points, though a slightly negative real return, but there still plenty of time for the investment hypothesis to play out.
That hypothesis is actually fairly simple, while these trusts pay out massive dividends the sum of the dividends that they will likely pay out over the remainder of their finite lifetimes is lower than their current market values.
Here's a great quote on WHX from a recent Seeking Alpha article by Shane Blackmon:
"The model is based on information from the 10-K, $90 oil, $3 natural gas, and other reasonable assumptions to figure out future dividends. Based on the model, WHX would pay $7.22 in dividends until it terminates (this includes the Wednesday ex-dividend of $.688/share). After this week, the model projects WHX dividends to be roughly $6.55/share. These dividends are also not discounted, which would give an even better analysis of its true value.
Currently, based on the $7.22 of dividends the model is projecting, WHX is currently trading at a 49% premium to expected dividends. This also doesn't include everyone's individual tax liabilities from the dividends. WHX remains overvalued and yield-chasing investors will likely see losses in the coming week after WHX goes ex-dividend. The Units have recently traded up roughly 20% as investor's bid up WHX ahead of their dividend. Traders are likely ready to dump WHX on Wednesday after they have reaped the dividend.
Whiting USA Trust I: Investors Continue To Overpay For This Trust
4) Here's a very similar article by the same author. I know people who own BP Prudhoe Bay Royalty Trust (BPT) and I advised them to sell after reading this article, which they did. Of course, there's a lot of assumptions that go into determining whether this trust is overvalued and a surge in oil prices would lead it to not be, but it just seems to me as though the "value" just isn't here and that buying BPT at this level, even without the imminent threat of collapse, is flying a little too close to the sun for my taste.
BP Prudhoe Bay Royalty Trust: This Trust Is Worth 50% Of Today's Price
5) I added AIG to my CAPS portfolio back in March saying the following:
I know, I know. AIG is probably one of the most hated companies in the world and the U.S. government owns over a billion shares of the company. Having said that, AIG is making money...enough that it just bought back 100 million of its shares at half of its stated book value. Doing that repeatedly over time will really create value, unlike Apple's buybacks which are happening to offset dilution near its all-time high. I'm certainly not comparing AIG to Apple, just saying that if a company is going to buy back shares, this is how it should be done.The stock has rallied quite a bit over the past several months and I expect that the massive government position in it places a cap on its share price in the short run, but a lot of very smart investors like this one.
I didn't have the ahem stones to go long this one with real money, but I have managed to pick up 19 CAPS points with it thus far.
Here's a good Seeking Alpha article by the always interesting Todd Johnson that lays out the bull case for AIG today.
45% Discount To Book Value Offers Investors Deep Value
6) I am definitely not interested in buying the deteriorating business of Cincinnati Bell (CBB) at this level, but this article contains more details on the potential spin-off of its CyrusOne data center division, which I would definitely be interested in if the price was right. Data Centers are pretty expensive right now (see Equinix (EQIX)), so CyrusOne might be a trendy pick that ends up being too expensive for my taste. Time will tell.
Spin-Off Announcement Creates 10% Upside For Cincinnati Bell
I think that's all I have for right now. Thanks for reading and make sure to share ideas if you have good ones. Have a fantastic evening!