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Special Situation Investing News - 8/14/2012



August 14, 2012 – Comments (20) | RELATED TICKERS: AGU , CJES.DL , WHXT

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!


20 Comments – Post Your Own

#1) On August 14, 2012 at 3:52 PM, TMFDeej (97.89) wrote:

Oh yeah.  One more:

As I have said many times in the past, I am certainly no fan ofthe pharma sector. Having said that, I do play special situations there from time to time. That's what I am doing here with Elan. I believe that the company's core business will benefit through lower expenses and in turn increased profitability from the spin-off of its discovery science and neotope biosciences operations.

Elan's Split Will Create 2 Very Different Companies


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#2) On August 16, 2012 at 10:41 AM, Momentum21 (98.06) wrote:

nice post, I happen to be a fan of CJES but like the other ideas as well, esp Elan

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#3) On August 16, 2012 at 2:04 PM, torpeydo (< 20) wrote:

What do you think of one of your previous picks - ATPGP.PK?  Down to $3.50 - think that they make it and not go bankrupt?

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#4) On August 16, 2012 at 5:58 PM, constructive (99.95) wrote:

VQ (mentioned here) jumped 15% today on news they are making progress on financing the buyout.  There's still a 12.2% spread to the deal price. I'm hanging on to my shares - I figure the latest disclosure has increased the likelihood of closing from 75% up above 85%.

My company is rolling out a new 401(k) plan and one of the funds recommended by our consultant is a merger arbitrage fund (MERFX). Sounds like a pretty bad idea to me - I'm a 1 merger per year kind of investor.

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#5) On August 16, 2012 at 6:02 PM, constructive (99.95) wrote:

Speaking of AIG, I asked the 401k consultant to consider Fairholme (FAIRX). She wasn't a fan - too much exposure to AIG and other large financials.  Can't really argue with that.

Of course, that approach is exactly how he got Fund Manager of the Decade...

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#6) On August 16, 2012 at 9:41 PM, TMFDeej (97.89) wrote:

Thanks Momentum.

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#7) On August 16, 2012 at 9:46 PM, TMFDeej (97.89) wrote:

Yeah torpeydo.  ATP is a real dog.  It's definitely by far the worst stock that I have ever personally purchased.  I don't understand what management was thinking, as I understand it if they felt a cash crunch coming they could have been paying the preferred dividends in stock instead of cash all along.  Every little bit helps.  I don't know why they wouldn't have done so.

Any way you slice it, ATP stinks.  Fortunately I sized my position properly and was able to shake off the loss with very minimal damage.  thank goodness for diversification.  It really didn't have much of an impact upon my overall portfolio.

It's tough to say whether ATP will officially file for bankruptcy, but it certainly looks like it.  The preferred shares will be in better shape than the common, but I don't know what sort of recovery there will be.

The stock has been crushed so badly that I'm hanging on to my preferred shares for now, I really don't have anything to lose by doing so and perhaps I'll learn something in the process.  


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#8) On August 16, 2012 at 9:48 PM, TMFDeej (97.89) wrote:

Nice call on VQ Mega!

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#9) On August 20, 2012 at 10:58 PM, constructive (99.95) wrote:

SAC is pushing for CLW to break up. 

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#10) On August 20, 2012 at 11:59 PM, constructive (99.95) wrote:

If ATPGP didn't turn you off junk-rated preferreds forever, LUTHP could turn out better. 

Last traded at 55 cents on the dollar, for a current yield of 14% and a yield to 2017 maturity of 22%. And ALU seems to be doing quite a bit better than ATPG.

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#11) On August 21, 2012 at 11:25 AM, TMFDeej (97.89) wrote:

Great stuff.  Thanks Mega.  HA re ATP.  Yuck.  I just need to remember that one every time I wonder why I diversify when something goes up massively.

Re CLW interestingly I am already long it here in CAPS.  With 200 open positions I sometimes forget what I have out there.  Here's what I said about it back in December:

I've seen a number of mentions of Clearwater Paper (CLW) in value circles over the past several months. In general, the paper business is a pretty bad one to be in, but this former spin-off operates in what seems to be a decent sub-segment of the industry...private label tissue and other products.

Clearwater has been implementing price increases, closing unprofitable facilities, making smart acquisitions, and ramping up a new plant. All of these things have the potential to act as catalysts for an increase in the company's earnings, and in turn its share price.

Here's a great write-up on the company by Value Slant:

Clearwater Paper (CLW)- A Play on Private Labels


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#12) On August 24, 2012 at 3:14 PM, constructive (99.95) wrote:

I had mentioned owning shares of Australia Infrastructure Fund (AIX:ASX) in one of your posts about Macquarie Infrastructure.  They just got a buyout bid from the Australian sovereign wealth fund, which plans to buy another $9B plus in infrastructure assets over the next few years. Maybe MIC or your other infrastructure investments could be targets?

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#13) On August 26, 2012 at 4:59 PM, constructive (99.95) wrote:

Pershing Square is pushing for BAM or SPG to make progress on a merger with GGP. Don't see this as too likely since BAM has de facto control of the board.

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#14) On August 26, 2012 at 5:47 PM, constructive (99.95) wrote:

Great post on distressed debt (makes me want to invest in Oakmark):

The Freddie Mac preferred trade isn't working out so well though.

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#15) On August 26, 2012 at 5:47 PM, constructive (99.95) wrote:


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#16) On August 27, 2012 at 10:57 AM, constructive (99.95) wrote:

That post inspired me to look for distressed debt. I've never looked at bonds before - tried using the Yahoo bond screener.

Didn't find any attractive distressed bonds comparable to LUTHP, but I saw a couple of potential arbitrage opportunities.

Long HOV bonds, short HOV
Long VRS bonds, short VRS
Long RDDC bonds, short RDDC (formerly FRZ)

There seems to be a disconnect here between pessimism in the bonds compared to optimism in the stocks. A similar trade would have worked well for the ATPG and KV-A bankruptcies, may be too late now though with the common having fallen so much.

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#17) On August 27, 2012 at 11:16 AM, constructive (99.95) wrote:

You could also do the same thing with GTIV, BONT, GOK, RAD and RDN.

AOI and GTN could be legitimate long distressed debt positions without an equity short.

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#18) On September 01, 2012 at 6:28 PM, constructive (99.95) wrote:

This is a great and surprisingly active message board:

Recent ideas include TARP warrants, HCOM (bankruptcy emergence), LVNTA (spinoff), OAK (IPO), HHC (spinoff), GKK, ALS:TO, etc. I may start posting over there.

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#19) On September 04, 2012 at 12:30 PM, constructive (99.95) wrote:

Tronox has been busy! They listed on the NYSE, split 5:1, announced a share repurchase plan, raised debt and declared a dividend.  The press releases make it sound like a 19.6% yield, but dividing by 5 to yeild 3.9% seems more likely. Shares trade at 7.5x estimated 2013 earnings.

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#20) On September 27, 2012 at 1:07 AM, constructive (99.95) wrote:

I just noticed a convertible preferred that lets you buy C at 6.8% below the current price. The convertible C-H automatically converts to C on 12/15/12.  If C stays at the current price, it's a 28% annualized return.

C-H looks equal to C below $30.30, with some extra upside above that point.

I already own shares of C, might do this trade.

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