Special situation investing

[zoro]

I know this goes against the Indexing orthodoxy here, but are any of you running part of your money in a special situation portfolio?  I usually have a few of these going on at a time, and as my portfolio has grown they are moving the needle less and less, but I still like to do them as a way of sticking it to the man..

For example this is one I did last month - I call this type “small scale arbitrage”  Westell (Wstl) was a cash rich value play - with an Odeous management. They were taking the company private by doing a reverse split 2000:1 and cashing out anyone with less than 2000 shares for $1.48. Funds don’t want a private company and so sold. The market price was $1.01. This allowed all four people in our family to use our Roth IRAs (and the trust fund we have to look after the dog if something happens to us)to buy 1999 shares  Total profit $450 each - tax free. Like I said not going to move the needle, but all good. Does any one do these , would love to learn others that I’m missing etc.

[celerystalks]

Nice!

Do these types of opportunities come along very often? How hard does one have to look for them? Also these types of situations pay out a few hundred dollars at most, right? I guess my point is: if you see one great..take it.  But the time and energy it takes looking for enough of these to make it worth you while may become like a part time itself.

[zoro]

For this specific type they come and go - this year I’ve done 5. In 2012 just after they passed sarbaines oxley I did around 35.

I find them easily in the SEC Edgar database. A company doing one has to file a form 13E3. I just do a text search for the term reverse split.

I have about 30 other special situations of other types I look for so I have automated the database lookup but you don’t have to.

For example I out the mutual bank Ipo investing that I Mentioned before in this category of small scale arbitrage even though the pay outs can be in the 100s of thousands and they take a bit more work.

[reeshau]

I've done a few; I consider them special situations, but you might just call them non-core holdings.

In November 2009, Cedar Fair plummeted as it suspended its distribution due to a debt covenant.  The problem was that it is a public partnership, so investors pay their share of the company's income tax directly and that distribution, in part, covered those payments.  Most investors were in it for the 7% dividend, not to pay money, so they left in droves.  My calculus at the time was that if 2010 was worse than 2009, the company could technically go bankrupt (violating further covenants, but still profitable).  But if 2010 reverted to the mean, the distribution would be 25% on the Nov 2009 price, in addition to the price appreciation.  Not only did the latter happen, but an activist investor became involved when the management tried to take the company private at $15.  The price multiplied by several times over the next few years.  Note that I wouldn't do this now; the price never matched 2009, even at the March lows.  And the risk is much higher with a blown summer season and uncertainty about next year.

I sweated through that one at every step, but it was a lot of fun.  I earned a lot, and learned a lot.

This time around, I am finding a lot of success with small biotech firms who have FDA-approved drugs, but whose introduction of those has been impacted or interrupted outright due to Covid.  I have had two buyouts this year--AIMT and BSTC.  The only sad part about those is that it's short term gains.  I am currently looking at ARDX, which while not yet approved has an NDA submitted with good data, and looks to launch in April.

[MustacheAndaHalf]

I've been a passive index investor for a very long time.  Then in Feb of this year, for whatever reason neither markets nor media wanted to predict exponential growth.  After a few rounds of predicting "breaking news", I decided I was onto something and invested based on it.

After pushing to 100% equities in late March, I realized there was another opportunity: buy individual stocks that had dropped over 67%.  If a stock at 33% of it's original value goes back to a full 100% recovery, it triples.  If half the stocks triple and half go bankrupt, that's still a +50% gain... and I expected far fewer bankruptcies in an election year.  Politicians will definitely spend taxpayer money to keep their jobs... so I bought dozens of stocks like that.

One example is restaurant company Dine Brands (DIN) which I've mentioned publicly is one of my prior holdings.  I started buying on March 23, and kept buying and selling over several months.  Ultimately my performance on DIN stock was over +70% - which sounds like a brag, but two things: don't believe people you don't know on the internet.  And second, if I had bought all on March 23 and sold all on Aug 10?  I would have made +170%.

So even speculating on individual stocks, there's something to be said for buy and hold!