Good Morning Folks,
I wanted to write a quick article on some of the exciting event driven positions I've added over the past few weeks. The market is filled with insane volatility due to recession fears, higher oil, followed by lower oil, followed by more fear - all bundled up into a whirlpool of uncertainty. But, hopefully amidst some of the fear and volatility, us astute investors can hopefully turn a profit.
So, here are my exciting new position that will hopefully work out.
Steel Connect (STCN)
Steel Connect works in the supply chain management space and is currently being taken private. The buyer is paying $1.35/share + a CVR (contingent value right).
The CVR holders (us!) will receive any additional money if the ModusLink subsidiary is sold for over $80MM within 2 years of the deal closing. To be honest, I don't know much about the fair value of ModusLink - nor do I really care. If the deal closes, which I anticipate it will given that the controlling shareholder taking the company private has a larger than 50% stake in the company, we'll get our money back and a free call option on the CVR.
STCN is currently trading between $1.33 - $1.35. I've initiated a small position at $1.34. I view this stock as a safe place to park some excess cash until the deal closes (maybe a few months?). If everything goes well, I'll make 1 penny/share (2-3% annualized return depending on when the deal closes) and I'll get the CVR for free. Maybe that's worth some money or maybe it isn't. We'll have to wait and find out.
Rubicon Technologies (RBCN)
Rubicon is basically a breakeven business with a lot of NOLs (net loss carryforwards) that can be utilized to minimize an operating business's tax liability. JANL is taking RBCN private through a weird structured transaction.
Basically, they are paying $20/share for 45% of the company and then RBCN will subsequently issue an $11 dividend and then delist. JANL will then pay existing shareholders in 3 years some additional money for the remaining shares of the company.
Currently, RBCN is trading at about $15.70.
If we assume every single shareholder will tender their shares to JANL for $20, the fair value of RBCN should be $15.05 (45% * $20 + $11 * 55%). Therefore, the stock is assuming the remaining stub value of the company that will get delisted is worth about $0.65. I don't have a good idea of what that stub value is worth, but I think it is probably more than $0.65.
I initiated a large position at $14.92 (see my tweet) and subsequently stupidly sold at $15.50 thinking the stub value wasn't worth anything. After realizing I made a mistake, I reinitiated a much larger position at $15.71. Either I see the process through or I'll offload shares if they ever hit $17.50+.
Check out this amazing Clark Street Value article discussing the opportunity in more detail.
Paragon Technologies (PGNT)
This idea goes along with RBCN. Basically, PGNT is a holding company that has a few operating businesses, a few properties, and a marketable securities portfolio. It is a miniscule company with a market cap of about $12MM. I recently initiated a position because they hold an 80,000 share position in RBCN. Despite RBCN climbing 80% over the past two weeks, PGNT has barely moved.
The stock is trading at its net current asset value + real estate. Meaning, at today's price of $7.50, you get the operating business (very cash flow positive) and all the marketable securities + RBCN for free. I think the stock should be in the $9-$10 range. I anticipate it'll slowly trend up once the market realizes that they just made a good chunk of cash from their RBCN investment.
Bally's Corp (BALY)
Bally's announced a tender offer to purchase a large slug of shares between $19.25 and $22. For some reason while BALY traded slightly below $20, the $20 7/15 puts traded for over $0.75. Meaning, you could sell the puts and either make the full premium if BALY traded above $20 or, if the shares trended lower, you could convert the puts and essentially own the shares at a $19.25 basis. At that point, you could sell one share and automatically participate in the odd lot provision of the tender offer and get all your money back.
I talk about this trade here.
The trade worked out great, but I think there is still some more meat on the bone.
The tender offer ends in one week. The maximum price they are willing to pay is $22. So for at least another week I anticipate the shares to trade below $22. It'll likely take about another week for any tendered shares that were prorated to settle into people's account. At that time, I anticipate the people who were in the stock just for the tender will dump their shares. So, to profit off of this, I've sold 100 shares of BALY short at $21.44 and sold the $22 8/19 puts for $1. This way, if BALY climbs above $22, although I'll lose money on the short, I'll make my full premium back on the puts. And if the inverse happens, I'll make money on my short while I lose on my puts. The only real scenario where I lose is if for some reason after the tender expires, BALY shoots to the moon. However, due to the forced selling I think will ensue, I don't foresee that happening.
Occidental Petroleum (OXY)
Not much to say here. Warren Buffett is basically gobbling up shares in the open market almost every day. Oil is at a structural deficit (follow HFI Research on Twitter). I own a small position and imagine Buffett will either make an offer for the company or OXY will simply trend higher as oil rises. I'll likely trade around this one as oil goes up and down.
Spirit Airlines (SAVE)
Frontier and Jet Blue are fighting over Spirit. Jet Blue's offer is superior in almost every possible way. Spirit keeps postponing the vote on the Frontier merger because no one is voting for the merger. I believe in the end Jet Blue will be victorious and so will any shareholder that buys at today's price.
SAVE currently trades for $24.30. I initiated a position at $24 and sold the weekly $25 calls. If SAVE skyrockets I'll secure a profit. If SAVE goes down I'll keep my premium I sold on the calls and just wait for the Frontier vote to either get postponed again or all out cancelled. Jet Blue will inevitably win here and shareholders will get $33. Once a lid is put on Frontier's hopes and dreams, I think SAVE will trade in the high $20s.
And that's it for me.
I have some other event driven names related to the oil, RV and crypto spaces. I'll hopefully share those in another articles in a week or two.
Happy Investing!
Josh
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