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Special Situation Investing News - 11/1/12

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November 01, 2012 – Comments (12) | RELATED TICKERS: NFLX , TROX.DL

Hi everyone. I hope that all of you who are on the East Coast are safe.  I am still without power at my home and probably will not have any for at least another week.  Yikes.  Hooray for having in-laws with power who live near by.  Hooray #2 for filling up with gas in both cars before the storm rolled through.  There is almost no gasoline around here right now and the stations that do have it have lines that are hours long and fist fights.

Here's a few short news items that I came across today that I thought may be of interest:

I absolutely don't get Carl Ichan's interest in Netflix, but he seems to like the company and its shares soared yesterday on news that the famous investor took a 10% stake in the company.

What's the end game for Ichan here? It's not like Netflix can cut costs. Content costs a ton and that's what the company needs to stay alive. Does he want to sell NFLX to one of the big boys like Microsoft, Amazon, etc... It's not like these guys didn't already know NFLX existed. This seems a lot like Ichan's last move of buying CVR and trying to get someone to buy the company out. Nothing happened there and I don't expect anything to happen here either.

If anything, I think that I personally would be more inclined to short NFLX than buy it on this news. I probably won't do either though.

Icahn Takes Stake and Netflix Shares Surge

http://dealbook.nytimes.com/2012/10/31/icahn-takes-stake-and-netflix-shares-surge/?nl=business&emc=edit_dlbkam_20121101

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I've been watching Tronox since the company emerged from bankruptcy in 2011. Emergence from bankruptcy is a type of special situation that can often result in absolutely amazing returns for investors. That's why so many smart investors have been sucked into buying shares of General Motors even though it is one of the worst run companies that I have personally ever come in contact with. See Six Flags or WR Grace, which almost single handedly made Ted Weschler's stellar career, for excellent examples of success stories.

TROX's stock has been completely hammered lately. It has fallen from a high of $160 to its current $20 per share. Ouch. So does this mean that it's a good buy at this point? As David Einhorn's joke goes "What do you call a stock that's down 90%? A stock that was down 80% and then got cut in half." A lot of great investors have been cut trying to catch a falling knife.

Well, there was an excellent article on the situation over on Seeking Alpha last month.

Tronox: This 4.4% Dividend Yield Equity Trades At A Bargain 5x Earnings

http://seekingalpha.com/article/896861-tronox-this-4-4-divid...

Here are a few key quotes:

Overall Tronox operates 465,000 metric tons of annual TiO2 production capacity. According to competitor Kronos's management, it would cost roughly $1.0BB to build a new 150,000 metric ton facility. That implies a replacement cost for Tronox's pigment capacity alone of $3.1BB. Add in the price tag for the Exxaro acquisition of $1.6BB (the Mineral Sands Segment now), and total replacement cost for Tronox works out to approximately $4.6BB.

Given that Tronox's stock trades at a TEV of $3.5BB, that means investors at today's prices are able to invest in Tronox's titanium ore and TiO2 pigment capacity at only 75% of cost! No wonder management recently issued debt to repurchase stock.

I strongly believe that the housing market in the United States is improving and will continue to do so. Since 40% of the demand for TROX's pigments comes from North America, and a great deal of that from white paint, this will definitely help the company. Heck even the recent horrible and tragic (my heart goes out to all of those impacted by them) storm in the Northeastern U.S. should lead to an uptick in demand for white paint. These things should help to offset some of the recent weakness in the Titanium Dioxide market.

One scary aspect of investing in TROX is that a global economic slowdown will definitely hurt the company, and I don't think that one is very possible. However it seems as though much of that is priced into the stock at this point.

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While I mentioned in my previous post that I am somewhat positive on the U.S. housing market, I'm not this positive. Restoration Hardware Holdings Inc. (RH) is scheduled to go publish this week and the company appears to be wildly overvalued to me. This actually would make a nice short component of a pairs trade, perhaps long TROX / short RH.

At the mid-point of RH's expected pricing this week the company trades at 26 times earnings. Compare that to the average of 16 times earnings (I wouldn't even pay that) that competitors like Williams-Sonoma Inc. (WSM), Ethan Allen Interiors Inc. (ETH) and Bed Bath & Beyond Inc. (BBBY) currently garner.

I'm definitely passing on this one.

Restoration Hardware Seeks Premium in IPO as Home Sales Improve

http://www.bloomberg.com/news/2012-11-01/restoration-hardware-seeks-premium-in-ipo-as-home-sales-improve.html

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Here's a great synopsis by Market Folly of the presentations that were recently made at the Great Investors Best Ideas Symposium in Dallas.  I particularly like anything by Mick McGuire.  His ideas always seem to have a special situation-esque flair to them

http://www.marketfolly.com/2012/11/notes-from-great-investors-best-ideas.html 

 

Thanks for reading everyone.  Have a great safe evening. 

Deej 

12 Comments – Post Your Own

#1) On November 01, 2012 at 9:23 PM, hypezero (68.89) wrote:

About Tronox - The big drop was due to a 5-1 split. So, the drop not that bad.

I looked into it at $24, but decided to pass cause it was not that much cheaper than its peers. Although, the dividend is nice and ceo bought a lot of shares, the company also bought back a lot of shares. But it is def a revisit if in gets in teens.

 Restoration priced at high range at $24 and Cramer is hyping it up. Seems expensive. 

Amit (HypeZero)

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#2) On November 02, 2012 at 9:07 AM, lemoneater (79.38) wrote:

Glad that you are okay, Deej!

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#3) On November 02, 2012 at 12:15 PM, Mega (99.95) wrote:

With KRO falling 55% I think it might be more attractive than TROX.

Of course you have to pick your poison, do you want the company that went bankrupt or do you want to invest with Harold Simmons?

I also looked at NL which owns 30% of KRO. It currently trades at around a 10% discount to NAV. When KRO was above $30 the discount was much larger - buying NL and shorting out KRO would have been a good trade.

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#4) On November 02, 2012 at 12:16 PM, Mega (99.95) wrote:

Good luck getting your power back soon.

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#5) On November 02, 2012 at 1:13 PM, Mega (99.95) wrote:

Here's a Barron's writeup on Porsche, which owns 31% of VW. VW bought Porsche's operating assets, so they are just a holding company now.

http://online.barrons.com/article/SB50001424053111904706204578002262308707842.html

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#6) On November 02, 2012 at 1:56 PM, Mega (99.95) wrote:

Leucadia (LUK) has been raising money for building a coal gasification plant, which will produce methanol, CO2 and other chemicals.

http://www.sfgate.com/business/energy/article/Investor-Contracts-show-Lake-Charles-plant-moving-3990507.php

Also in Louisiana, Darling (DAR) and Valero (VLO) are expected to open their biodiesel plant in the first half of 2013, giving a substantial boost to earnings.

http://seekingalpha.com/article/684601-darling-international-s-joint-venture-with-valero-makes-this-value-stock-more-valuable

I think methanol and biodiesel are more promising than other alternative transport fuels including ethanol, CNG and batteries. They have fairly high energy densities and can be refined at a reasonable price. With LUK and DAR you pay a low price for the current assets, and get their new chemical plants for free.

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#7) On November 02, 2012 at 2:36 PM, Option1307 (29.90) wrote:

Great stuff, thanks! +1

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#8) On November 02, 2012 at 3:10 PM, Mega (99.95) wrote:

I view Icahn's involvement in CVR as fairly successful so far. He bought a controlling stake of 82% of the company at a reasonable price, but didn't get the last 18%.  Of course he can buy the rest in the future, possibly at a better price. Also if he waits more than a year to sell the company to a strategic buyer, he will save a lot of money.

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#9) On November 04, 2012 at 10:06 AM, TMFDeej (99.46) wrote:

Good catch Amit.  The chart that I was looking at didn't reflect the split.  I suppose that it doesn't really matter that much anyhow.  I try to look at where a stock is going not where it's been.  I suppose that's a good lesson for life as well.  Always look forward, never look back.  Regrets and obsessing about the past don't accomplish anything.  It's easier said than done, but I continue to work on it in my life.

Deej 

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#10) On November 04, 2012 at 10:08 AM, TMFDeej (99.46) wrote:

Thanks Lemon.  We're into day six without power.  The funny thing is that when I stopped back at my house yesterday to clean out the fridge and get some other things done, the same tree that toook the power lines down at the end of the block was still sitting there.  Untouched.  Amazing.  I have a feeling that it's going to be a while before I have power back at home.  Fortunately, I am blessed to have nice in-laws who have power who live fairly close by.  

In silent protest of the power outage I have decided not to shave my beard until I have electricity :).  Let's hope that I don't look like Rip Van Winkle before this whole thing is done.

Deej 

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#11) On November 04, 2012 at 10:09 AM, TMFDeej (99.46) wrote:

Thanks for the ideas and the well wishes Mega.

Deej 

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#12) On November 13, 2012 at 4:22 PM, hypezero (68.89) wrote:

I dont know if you saw Tronox (TROX) today, but got hammered from earnings. Down over $3+, it's at $15.

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