Month: March 2017

Indirect Hard Lesson – Baker Street Capital

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The more hard lessons you can learn vicariously rather than through your own hard experience, the better.

– Charlie Munger

I recently came across this Forbes article [The 34-Year-Old Hedge Fund Manager Who Bet Everything On A Stock That Tanked] discussing about a doomed hedge fund due to heavy concentrated bets. In short, the fund invested over 85% of AUM in a single name, Walter Investment Management [WAC], and the stock suffered a 95% slump since its investment in 2015. Per this fund’s SEC 13F filing, WAC seems to be the only US long position it holds currently. Given the significant size and the drastic drop of stock price, regardless other non-US longs or other shorts, the WAC position will possibly wipe the whole fund out.

Out of curiosity, I further researched Baker Street and its founder Vadim Perelman. It appears that Perelman is a strict value investor, following legendary investors like Warren Buffett, Howard Marks & Seth Klarman’s doctrines closely. Before the WAC position, Baker Street had also played a concentrated bet on Sears Holdings (SHLD). More detailed info can be found on this Barron’s article.

Some resources and interesting reads:

Based on these writings, Perelman certainly appears as a talented and diligent investor (also with sense of humor for the sake of the Berkshire joke). However Buffett would hardly approve his approach as intelligent investing (remember the oracle of Omaha’s 2 rules: Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.) This drives me to think what went wrong to lead a talented value minded investor to such a flunk.

Trying to put myself in Perelman’s shoes, here are my further thoughts and some lessons I learned from this case study:

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Texwinca (0321.HK) – a Cigar Butt or Anything More?

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Disclosure: I do not hold position in mentioned stock. Also, the price has increased slightly since I initially wrote it up (from HK$5.11 to HK$5.30), however all points in this write up are still valid with a price level of HK$5.30.

Company Overview and Recent History

Texwinca is a Hong Kong-listed textile & apparel company, with two main business segments: 1) Textile business, which produces, dyes & sells knitted fabric and yarn, & 2) Retail and distribution business, which sells casual apparel and accessories. Each segment contributes about the half of the revenue to the firm. The vertically integrated cost-efficient model used to work well, however both segments have been hit hard by some adversity recently.

Texwinca’s textile business is one of the largest fabric producers in the world, serving many global fashion brands like A&F, Ralph Loren and Gap. However, it is facing cyclical headwind driven by the soft global (especially US, which is the main textile revenue source) economy and the increasing production cost in mainland China.

The retail business sells its apparel majorly through brand Baleno. However, Baleno (along with many other local mainstreet fashion brands like Esprit, Giordano & Meters/bonwe) has been squeezed very hard in its mainland China market (its main retail revenue source) by new-entering international fast fashion brands like Zara, H&M and Uniqlo. Baleno, once a high end fashion brand, lost its value significantly in the past few years, and is now considered merely as an “immigration worker (lowest income city worker from rural area) brand”. To cope with the competition, the business tried to streamline by disposing all the non-core brands and focus solely on Baleno.

Driven by weak performance on both sides, the stock has lost more than 40% of its value since the recent peak at HKD 9.38 in July 2015. At the current stock price (5.11), the stock looks attractive from first glance with following traits:

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How much do finance people make in Chicago? – 2016 CFA Compensation Survey

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Following the 2015 comp survey (find 2015’s number in this old post), CFA Chicago Society recently published 2016 version. This is the second year of this informative survey. PDF report can be downloaded from the link at the bottom.

CFAChicagoComp_2016

Download link: compensation_survey_2016

 

 

CDEV Stock/Warrant Arbitrage Play

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Centennial Resource Development [Nasdaq:CDEV] is a Delaware Basin pure-play oil producer. It was formed through the Silver Run Acquisition Corp (a special purpose acquisition company) acquiring Centennial Resource Production (a distressed independent oil producer) in October 2016.

As a sweetener of the Silver Run IPO, each IPO share include a share of the straight stock and some warrants with strike price of $11.5 and expiring at 2/23/2021. On 2/27/2017, CDEV released an announcement of its intention to deliver notice of redemption of warrants (link here). Long story short, the warrants carried some condition that, if triggered, will allow the company to redeem (forcing exercise) all the outstanding warrants. The condition is that the stock’s close prices are at least equal or larger than $18 for any 20 trading days within a 30 trading day window, which was met by 2/24/2017. According to the announcement, the company will initiate the redemption starting from 3/1/2017 and the warrant holders will have until 3/31/2017 to exercise their warrants, or the company will redeem it at $0.01/warrant! Obviously, the most important thing for any warrant holders is that don’t forget to exercise or sell your warrants before 3/31/2017.

Some other thoughts I had is checking the arbitrage opportunity, now that we know the warrant is going to expire soon. I called up the investor relation department of CDEV and confirmed the cash-based approach (i.e. exercising the warrant by buying each share of CDEV @ $11.5) is no longer available, and the investors only have the cashless option, which is to convert each warrant to 0.376 shares of CDEV.

As of today, CDEV is closed at $18.64 and CDEVW is closed at $7.03. A quick calculation can be seen in below:

0.376*$18.64-$7.03 = -$0.02136, implying 30 bps spread on the warrant

Regarding liquidity capacity, CDEV had average daily volume about 1 million, and CDEVW however only had about 100,000. You probably cannot put more than 10% the daily volume or the market impact would eat the spread up. Given the liquidity constraint on the warrant side, it is already a gone opportunity, unfortunately.

Looking back, if someone were able to act on the announcement day (Stock closed at $19.54 & Warrant closed at $7.29 on 2/27/2017), the spread would be  0.376*$19.54-$7.29 =  $0.05704 (78 bps), which is still small but may be more actionable.