A thread on delisting based special situation opportunities in India and how to play them in 2 ways:
- Just after the company announces delisting offer
- after the delisting fails
So, making money in stock markets is about recognizing patterns
Finding the ones which work and then investing whenever an opportunity with a similar pattern emerges
With respect to delisting, there are 2 patterns we believe work
First one is just after the delisting is announced by the company
We have discussed this through multiple cases and you can read about (4 cases) them in our presentation, 6th page onwards - katalystwealth.com/2021/10/21/spe…
Important learning:
- Avg. timeline - 3-4 mnths
- Decent absolute returns, though exit needs to be timely and not at the very end
- Aim for smaller consistent gains than max. possible returns in each opportunity
- MNC delisting's have a better track record
2nd way one can make money in delisting opportunities is after the delisting fails:
Our observation - every time a company comes up with a delisting offer, one can expect something positive to happen in the business/sector in 2-3 years.
In fact, a failed delisting can throw up a good investment opportunity because correction, post a failed delisting, usually marks the bottom of the stock
Well, when the promoters come up with a delisting offer, they have to buy shares from public shareholders. Unlike IPOs, at the time of buying shares, they would like to pay the lowest possible price
Thus, most of the time promoters come up with a delisting offer when the industry cycle is down or when their recent performance has been bad but they expect a major improvement going forward
We observed the above pattern in several cases like Vedanta, Ineos Styrosolution, Linde, etc.
In fact, we made use of this to our advantage in Allcargo by not selling when the delisting failed and adopting a trailing stop loss strategy.
On 13th Sep'21 Allcargo informed exchanges about the failure of the delisting offer
Stock opened 7% lower, but soon recovered and closed 2.5% down indicating strength in the stock despite the adverse news
We asked our members to hold on to the stock with a trailing SL of 210
Recently the company announced good set of results and the stock has shot up to 348
Other cases - Ineos Styro delisting failed in Jul'20. Stock corrected from 870 odd levels to 500 odd levels and since then has recovered to 1500 with major improvement in operating performance
Linde India delisting failed in Jan'19. Stock corrected from 780 to 420 and since then has moved up to 2,500 with major improvement in numbers
Disclosure: This is not a reco to buy/sell stocks mentioned above. Allcargo recommended to members at 124 and still on. RA doesn't hold
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If you have been investing in stocks, it's very likely that at some point of time you must have had a banking stock like - HDFC, ICICI, SBI, etc. in you PF
Analysis of bank’s accounts differs significantly from other cos.
(1/n)
In this 🧵, let's look at some ratios, which are unique for banks
Net Interest Margin (NIM) - For banks, interest expense is main cost (like cost of RMs for cos) and interest income is main revenue source
Diff. between interest income and expense is Net interest income
(2/n)
NIM is net interest income earned by the bank on its average earning assets
Assets comprise of advances, investments, balance with RBI and money at call
NIM is an indicator of the ability of a bank to generate returns. Higher the NIM, higher the profit a bank can earn
Bad earnings + volatility can deliver Great returns
Investors consider bad earnings and volatility as their worst enemies
Let's see through an example how you can befriend them and aim for 5-10x returns on cyclical stocks
(1/n)
Let's first look at stock price chart of a company – Gravita India
Some observations:
- Stock is extremely cyclical and volatile
- In the last 9 years, it has reported 80% + fall from highs twice
- It has also reported 1,000% + gain from lows twice
(2/n)
As investors, our primary concern is how to capture a part of 1,000% + gains and at the same time how to avoid major losses
For the same ex. let’s see if there’s a pattern (using both chart and P&L nos.) we can identify using which we can capture 400-1000% moves
All investors want their stocks to go up 5x, 10x, 20x or more
We have all heard stories of how a certain stock went up 50-100x for great investors like - Mr. Jhunjhunwala, Mr. Vijay Kedia, Mr. Ashish Kacholia, etc
Here's our experience of a 40x stock
(1/n)
In our over 13 + years of investing and recommending stocks to clients, luckily, we have had quite a few 4-50 baggers and have come to the following realizations:
1. Identifying good companies is relatively the easiest
(2/n)
2. Remaining invested during downturns or through periods of consolidation/side-ways movement is tougher
3. Buying stocks when the cycle (business/market or both) is down is the toughest, but also the most rewarding
In case of Buybacks, acceptance ratio is a key factor that determines risk-reward potential
Unfortunately, neither theoretical nor actual acceptance ratio is accurately known before ex-date
Here's 1 simple hack that can help you pick buybacks with higher acceptance ratio
(1/n)
Look at stock price chart of last 1-3 years of the company
If the stock has been in a downtrend and the buy-back price is such that the stock has traded largely above the same for a major period of 1-2 years, the acceptance ratio might turn out to be substantially higher
(2/n)
Why higher acceptance?
Simply because a lot of existing investors would be sitting on losses and wouldn't like to tender their shares at buy back price which might be lower than their purchase price