Special Situation Investing

Saturday, April 21, 2007

Etrade Canada Venting

Well just looked at my latest transaction from Etrade Canada and man am I pissed. I usually trade in American dollars so I haven't really noticed this before but the company is charging very excessive rates on my trades. I bought stocks yesterday when the exchange ratio was in the 1.12-1.125 CAD per USD range. Great. Etrade, however, actually ended up using an exchange ratio of closer to 1.143 on my purchase. That amounts to a ~2% grab just on the exchange ratio! That is huge! Consider that you will also pay ~2% on the way out as well. It makes it completely impossible to own stocks for anything less than years. A cigar butt with a 30% gain isnt' even worth your time as after Etrade takes it's bite you only have 26%.

I think these fees are excessive, swept under the mats and frankly I'm looking for a new online broker. IF anyone knows of one that doesn't charge massive exchange rates, let me know.

Saturday, March 24, 2007

State Street Financial (SSFC) - Going Private Transaction

Well it's now official. After a shareholder vote, SSFC will be repurchasing from shareholders with fewer than 750 shares for $10 a pop. The stock closed around $8.60. I obviously didn't get rich off of this one but it was low risk and a high rate of return relative to the time I was invested.

More details on SSFC here.

Temple-Inland (TIN) - Split-up Announced

After prompting by Carl Icahn, Temple-Inland (TIN) has announced that they will be splitting up by year's end.

The forest-products company said Feb. 26 that it plans to split into three public companies and sell its timberlands by year-end.


But Jastrow is willing now to spin-off his company's financial services and real estate operations while keeping its manufacturing operations, which include packaging and building products. "Each of the three public companies - manufacturing, financial services and real estate - will be well positioned in the marketplace, have an appropriate capital structure and will benefit from greater strategic focus," Jastrow said in the release.

Tuesday, February 27, 2007

Buffet - Words of Wisdom

Thought this quote was rather appropriate on a day like today.

"Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market."

Warren Buffet

Let's get back to the market. Nothing has fundamentally changed in my view. So Chinese banks can't loan out quite as much money. This was announced in advance, I remember reading it. I mean let's think about what is happening here. The Chinese government is taking steps to temper growth and prevent recession. What is wrong with that? Would the market have preferred if they let the train run off the tracks? When I read about the major recessions in Japan and in the US it seems one of the biggest problems was the government stood idly by. China may or may not hit a recession but long-term I view the current situation as a positive. The biggest risks when investing in China are political not economic in my view.

Somebody had a run at Cheney? How is that different from any other day? Don't get me wrong, I feel the situation is horrible and I really do have sympathy for those who lost their lives in the attacks. However, I also have sympathy for those who have lost their lives in all the prior suicide bombings that the market completely ignored. I don't see what the difference between today and any other day was.

Greenspan thinks there might be a US recession. He says the bull market is long in the tooth. Jesus christ, is this not something people could have figured out for themselves? Is he doing anything other than validating what anyone who went through the last bubble/crash is already thinking?

I don't know what is going to happen tomorrow or even this year but staring at these long rows of red I can't help thinking that maybe, finally prices are going to get back to levels where I can really start buying again.

Sunday, February 25, 2007

Travelcenters of America (TA) - Spunoff from Hospitality Properties Trust (HPT)

Found an excellent post detailing the spinoff of Travelcenters of America (TA) from Hospitality Properties Trust (HPT). Unfortunately, I am already over a month late on this one and it has seen a tremendous surge from $28-29 to over $38 on Friday. Still worth watching, analyzing and potentially buying. I don't have time right now but I'll get back to this one. For now, check out the post link above.


A reader posted a comment to this entry and I thought it deserved inclusion.

An excellent post?? It's an awful post. It doesn't detail the huge lease commitments to HPT (+$150MM/pa and rising)and fools you into thinking there's "no debt". It doesn't detail the onerous restrictions HPT placed on TA (like that HPT has to finance every deal and has right of first refusal everywhere), doesn't discuss all the insider conflicts, doesnt say what happens when the lease expires. And the low multiples referred to are not substantiated. There's no company guidance and limited historical info. Read the S1, it's impossible to conclude what normalized cash flow is without making stupid assupmtions, like basing multi year forecasts on one nine month period. Stock is up from all the folks who read the blog and bought the stock without doing homework. I'm not short TA and am not even saying that it's necessarily a bad idea but I am saying that there's a lot more to the story including a lot of negative stuff and that it is not as cheap as Harper makes it out to be. Read Feb20 Wall Street Journal article "TravelCenters Aims to Please--Its Ex Owners" and of course read the S1--

This reader does have a point. I try to post references to all spinoffs I come across, good or bad, and if you've read my blog you'll know that I think most are bad. After having a chance to review (briefly) the situation I would have to agree that the initial writeup didn't cover all of the issues. Reviewing the S1, there are a number of issues, highlighted by the reader above, that do need to be addressed. Honestly, I just don't have time right now to really crunch all the numbers out but I have extracted some of the more relevant data from the S1. I highly recommend you go through the S1 yourself to reach a decisive conclusion.

From the S1.

We were formed for the benefit of Hospitality Trust and not for our own benefit. Our formation allows Hospitality Trust to acquire and retain ownership of 146 travel centers without adverse tax consequences to Hospitlity Trust. Because we were formed to benefit Hospitality Trust, some of our contractual relationships and the terms of our initial business operations may provide more benefits to Hospitality Trust than to us.


Our creation was, and our continuing business will be, subject to conflicts of interest, as follows:
    Two of our directors were trustees of Hospitality Trust at the time we were created.

    Upon completion of the spin off we will have five directors, one of whom, Mr. Barry Portnoy, also will be a trustee of Hospitality Trust and the majority owner of Reit Management, one of whom, Mr. Arthur G. Koumantzelis, is a former trustee of Hospitality Trust, and one of whom, Mr. Thomas O'Brien, is a former executive officer of Hospitality Trust.

    Mr. O'Brien who will be active in our senior management activities is also an employee of Reit Management. Another Reit Management employee, John R. Hoadley, is our treasurer and will also be active in our senior management activities. Reit Management is the manager for Hospitality Trust and we will purchase various services from Reit Management pursuant to a management and shared services agreement.
These conflicts may have caused, and in the future may cause, adverse effects on our business, including:
    Our lease with Hospitality Trust may be on terms less favorable to us than leases we could have entered as a result of arm's length negotiations.

    The terms of our management and shared services agreement with Reit Management may be less favorable to us than we could have achieved on an arm's length basis; specifically, our payments to Reit Management of 0.6% of our fuel gross margin and 0.6% of our total non-fuel revenues for shared services, equal to $4.7 million on a pro forma basis for the nine months ended September 30, 2006, may be greater than if these services were purchased from third parties.

    Future business dealings between us and Hospitality Trust, Reit Management and their affiliates may be on terms less favorable to us than we could achieve on an arm's length basis.

    We may have to compete with Hospitality Trust, Reit Management and their affiliates for the time and attention of Messrs. Portnoy, O'Brien and Hoadley

Minimum Rent. The lease requires us to pay minimum rent to Hospitality Trust as follows:
Lease Year

Annual Rent (000s)

Per Month (000s)
$ 153,500
$ 12,792











In addition, minimum rents may increase if Hospitality Trust funds or reimburses the cost of renovations, improvements and equipment related to the leased travel centers as described below.

Improvements. Hospitality Trust has agreed to provide up to $25 million of funding annually for the first five years of the lease for certain specified improvements to the leased properties. This funding is cumulative, meaning if some portion of the $25 million is not spent in one year it may be drawn by us from Hospitality Trust in subsequent years; provided, however, the entire $125 million of funding must be drawn before December 31, 2015. All improvements will be owned by Hospitality Trust. There will be no adjustment in our minimum rent as these amounts are funded by Hospitality Trust.


Income from operations. Our predecessor generated income from operations of $74.3 million for the nine month period ended September 30, 2006, compared to income from operations of $77.2 million for the same period in 2005. This decrease of $2.9 million, or 3.8%, as compared to the 2005 period was primarily the result of the $11.9 million increase in share based compensation expense in the 2006 period. The effect of increased share based compensation expense was somewhat offset by the $4.4 million expense reduction related to claims settlements and the increased gross profit that resulted from increased fuel and non-fuel sales volumes and fuel margins per gallon.

Tuesday, February 20, 2007

Goldman Sachs (GS) - Portfolio Insurance Puts

I can't help feeling increasingly nervous as the major indexes continue their ascent. While we are certainly not seeing the degree of optimism in the 99/00 bubble it does seem that the markets are warming up to the idea of prosperity. I however, have my doubts. Now I don't want to be one of those fire and brimstone perma-bulls who is constantly predicting the end. However, I feel there is a realistic and poorly discounted chance that the economy will hit a snag or worse.

It could be housing, consumer debt, depreciation of the dollar, or some unforseen series of events. I really just don't know. However, I am not willing to continue to hold the overwhelming bulk of my net worth long in equities.

As such, I have decided to purchase some puts to offset the risk. I don't normally condone hedging as I feel it generally just diminishes results. However, the risk premium on certain companies is sufficiently low that it seems like a good bet. Today, for instance, I bought $180 Jan/08 puts on Goldman Sachs (GS) for $5.50 an option. For those new to options, what this means is that for $5.50 a share I have the right to sell GS for $180 up until the third friday of January 2008. Of course, this only makes sense if GS dips below $180 over the next year, otherwise the position is a complete loss.

Let me give you an example. If the stock price were to descend to say $150, well you could buy the shares for $150 and sell them for $180, providing a $30 spread. Given that you bought the options for $5.50 and generated $30 from the trade, this scenario would provide a 445% profit. It is more complicted than this as the options are worth more than the spread based on the amount of time remaining before expiration. Also, you don't actually need to do the buying and selling of the shares, you can just sell the options and let someone else worry about it.

Back to Goldman. If you don't know, Goldman Sachs is probably the preeminent investment bank of the world. As the number of IPO's and leveraged buy outs have surged, GS has benefitted. They also operate significant internal trading operations which have generated substantial profits lately. Over the last few years I have watched their stock price explode from the $80-90 range in 2004 to over $220 at the time I sit writing this.

Now I am not saying that GS is not a good company. I actually think it is an excellent firm with a strong reputation and I would never short the stock. However, it is highly leveraged to the success and failure of the stock market. Should things turn south, Goldman will feel the pain and in amounts proportionately higher than the rest of the market. There is also, always the small chance of failure of some magnitude by it's investment division even in an up market. Look at the demise of Amaranth for example. I have heard many good things about GS's investments, how they always seem one step ahead of the market and the massive amounts of profit they generate. I am skeptical. People make mistakes, computer models have flaws and limitations, six-sigma events DO happen in the market.

I should mention that the options I have purchased represent a VERY small proportion of my portfolio. Roughly 0.5% of my net stock holdings. So I can afford to take a complete loss on the thing and it would just be a marginal tick off my gains for the year. However, in a nasty market, one where the stock market gets hit 20-30% I can envision turning a profit of 5-15x my investment, thereby buffering my other losses.

Sunday, February 18, 2007

Halliburton (HAL) - Spinoff of KBR Unit Continued

I did a bit more digging on the specifics of the KBR spinoff from HAL. The initial IPO of KBR stock represent approx 19% of outstanding stock. The remaining portion will be distributed by Halliburton to existing shareholders, hopefully via a spinoff. KBR currently has a market cap of $3.74 B which includes the 81% ownership by HAL. As such, ~$3 B of HAL's market cap is attributable to it's KBR stock. Excluding that $3 B from HAL's market cap of $30 B gives a rough value of $27 B for HAL post-KBR.

So you could say that the market is valuing HAL's energy services group at $27 B. Energy services provided $3.4 B operating income in 2006 and $2.3 B in 2005. This was generated from $13B revenue in 2006 vs $10B in 2005. Interest expense was nominal and largely counterbalanced by interest income. Taxes take roughly 1/3 of profits. This leaves us with $2.3 B or so net income from the energy group against the $27B market cap and provides for a P/E of less than 12. The unit is likely to grow at least in the short-term as demand for it's services continues. The oil majors, especially Exxon (XOM), have been holding back on oil exploration until the last couple years after being burnt by previous oil rallies. This is starting to change, as confidence that oil will remain high historically builds and as the majors struggle to maintain existing production. The company also has decent geographic diversity with ~55% of revenue coming from outside North America.

What you need to keep in mind, however, is that in the long-run if the price of oil were to fall the majors eventually would scale back their exploration and development projects. Have a look at it's five year chart to see how much it has surged with the price of oil.

Theoretically, KBR should be the asset of choice in this transaction. It is significantly smaller than HAL ($3.7 B against $27 B), it is hated, it's dependance on government contracts make revenue and earnings unpredictable, and it is in a different sector than HAL. By all rights, this stock should get pounded after the spinoff occurs. You would think that most HAL owners would just love to get rid of the stock and associated bad memories. We will see if that happens. Personally, I would only be a buyer of KBR if it got absolutely nailed as at present I am not particularly interested in this type of business, I don't see much competitive advantage and god only know what it's future revenue will be like. In other words, it legitimately might be a bad buy and needs a greater discount for me to purchase. Consider that it IPO'd at $17 and currently trades for $22.88 so it is already considerably higher than initially valued by it's owners.

HAL is not the only cheap oil services company either, Baker Hughes (BHI) goes for about 13x forward estimates and Schlumberger (SLB) for about 13.5 x forward earnings. So yes it is cheaper than it's competitors but then again it has lower margins than them as well.

On the flip side, I'll just throw in that George Soros bought some 1.9 million shares in HAL during the past quarter.

What it comes down to is your perception of where oil prices are headed. They don't need to surge upwards for HAL to be a good buy, even if the market could maintain present prices for awhile you could see upward pressure on the stock. However, I already have energy exposure and quite frankly I think Schlumberger is a superior company to HAL. I will keep an eye on the price of KBR and may take advantage of any selloff's that occur post spinoff.

If you are still interested in HAL, check out the fourth quarter results here.

Saturday, February 17, 2007

Halliburton (HAL) - Spinoff of KBR Unit

While not exactly recent news, I thought it was worth mentioning that Halliburton (HAL) is planning to spinoff it's engineering and goverment services division, KBR, this April. KBR stock was initially floated in November with the bulk of the shares to be distributed via the April spinoff. The KBR unit has been plagued by negative publicity and investigations into the allocations of government contracts. The division's reliance on the distribution of government contracts, which can produce very lumpy results, also limits the earnings multiple. No doubt, HAL is hoping that a spinoff will allow it's oil services section to receive a higher valuation level with little impact on the value of KBR.

At first glance this appears to be a compelling spinoff situation. Halliburton plays a prominent role in a booming albeit highly cyclical industry. One of the limiting factors in oil exploration and development, in fact, is the rising cost of the enabling technologies provided by Halliburton amongst others.

I plan to do more analysis on the specifics over the next few days with a more detailed post to follow. In the meanwhile, if anybody has any comments on the spinoff I would appreciate hearing them.

Tuesday, February 13, 2007

Time Warner Cable (TWC) - Cleared for Trading

Time Warner Cable has cleared regulatory hurdles and should begin trading as a separate company (TWC) on March 1. As the name suggests, TWC is majority owned by Time Warner (TWX) and represents assets purchased from bankrupt Adelphia.

Even after becoming public, the company will still be majority owned and controlled by its parent company Time Warner Inc
Time Warner Cable will distribute 156 million shares of its stock, or about 16 percent of its total outstanding shares, to stakeholders in Adelphia. That stake is valued at approximately $6 billion
Time Warner Cable's shares have been trading on a temporary or "when-issued" basis on the New York Stock Exchange since early this year under the symbol "TWCAV." Those shares slipped 25 cents to $40.75 in midday trading.

Monday, February 12, 2007

Webzen (WZEN) - Distribution Agreement

Korean online game developer Webzen (WZEN) has signed an agreement with The9 to distribute it's new release Huxley, in China. WZEN surged over 9% on the news.

The total projected amount of the agreement for Huxleys distribution and service rights is estimated at $35 million. This includes the down payment and a minimum guarantee for a three-year period, while the royalty rate is set at 22% for the duration of the contracted term. The agreement covers the PC version of the game.

To put things into scope, China is only 1 of many markets and the company has several other products in-use and under development. As such I don't know that this is as significant an event as the price change would indicate. Then again, I've believed in Webzen for awhile, having previously purchased shares. What I am hoping, what I have seen in the past, is that the company will continue to get it's new games out and press releases like this will continue to print. However, having seen it 20% lower I see no reason to add to my position and will just hold my existing shares.