Mr. Market Blog "Investing is Most Intelligent When it is Most Businesslike"


The Anatomy of a Special Situation

(First and foremost, @MRRobey deserves credit for initially finding the example below. I'd recommend following him on Twitter, and you can do so by clicking here)

Special situations continue to be an excellent way for small investors to pick up extra dollars for little risk or, if you're a larger investor, provide a convenient way to take your significant other out to dinner. All that's required is a little time, reading, and patience.

To show you what’s involved, I’ll be breaking down the case of Cellteck, INC. The key to finding these niche deals is to look for the words “reverse stock split” in filings. I have an alert setup through Edgar Online that e-mails me the filing when those words are used. With an alert setup, it will take only a few minutes every day to scan through what’s garbage and what’s not. Here’s what I saw with Cellteck:

Now this looks pretty good, right? At the time, you could have bought 1,999 shares for $29.98 and received a cash distribution of $49.97. Stop for a minute and think of how many Dilly Bars you can buy for $20:

However, it’s not time to celebrate yet, you still need to read the complete terms of what management is offering. So as we keep going down the filing we get to the entire of overview of what’s being offered:

AH-HA, now this is where it gets interesting. Here’s the key: “….by stockholders who each in aggregate own 2,000 or more shares of our common stock will be reduced in accordance with the exchange ratio of 1-for-800 (ie: Our 2001 shares would go down to 2.5 shares), except that any fractional share resulting from the selected exchange ratio for the reverse split will be rounded up to the nearest whole share (ie: ok now they’re going to take us from 2.5 to 3 shares), and any of these stockholders who would have less than 100 shares of common stock as a result of the reverse stock split will have their shares of common stock rounded up to a “round-lot” of 100.” (ie: bingo!)

Here’s what really happened in my personal account. On 1/18/13, I purchased 2001 shares for .015/share or $30.

Now comes the exciting part, waiting. We wait and wait and wait. In June, the shares go contra asset, split 1-for-800, and 2 shares land in my account under the new symbol EOPT. Whoa whoa, 2 shares? Aren’t you supposed to get 100? I am, but the new shares aren’t trading yet, so I figure there isn’t a reason to call my broker. On July 8th the shares finally round up to 100 and I sold them all for $5.00 or $500:

Which means I got paid $470 to read a document for 15 minutes and then hang out for 6 months. As they say, “It’s great work if you can find it.”

Generally a healthy dose of skepticism exists about these little deals when I tell people. Most people don’t understand why these types of things exist so they assume something is wrong with the thesis and end up doing nothing. I’ve come up with two plausible reasons for their existence:

1. People are lazy and they don’t like to read documents
2. Many feel these tiny deals won’t “move the needle” for their portfolio

A hedge fund manager, who was presenting to Bruce Greenwald’s class, once made the best argument I’ve ever heard for taking advantage of these special situations. He took out a crisp $20 bill, showed it to the students, and then proceeded to say, “If I throw this $20 bill on the ground right now and walk away, how many of you aren’t going to pick it up?” The class was silent.

Whether you decide to start searching these small inefficiencies out is up to you, but I quite enjoy them. If nothing else, they let me buy a nice bottle of wine from time to time.


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Bill Ackman thinks the whole thing is a pyramid scheme.Not surprisingly, Herbalife disagrees.

Ackman manages a hedge fund that has shorted more than a billion dollars' worth of Herbalife stock. If the stock falls — and Ackman says he thinks it will fall all the way to zero — the fund will make money.

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