Did you buy Netflix ?

This blog is a continuation of one of my previous blog posts about friendly takeovers. I argued that when an activist like Carl Icahn invests on a company, it is a great short term opportunity to buy the stock and sell it short term. Another proof-of-concept, Carl Icahn bought 10% stake in Netflix and Netflix gained about 14%.

Chart 1: Stock price increase in Netflix

Table 1: The investment opportunity 

1 day return	13.88%
Annualized basis	40116436056240800000000%

Now I am sure that most of you would be able to appreciate this kind of investment opportunities. In the next week, I am going to make a case relating to the timing of this kind of investment. See you soon.

Stay hungry! Stay Foolish  

You know what Sandy did….(Part 1)

Natural calamities appear once in a while and challenges both personal & business health of people around. Hurricane Sandy is no exception. My series of blogs are more focused on business. In this blog and in the next few blog posts, I am going to point out what kind of business implications does hurricane Sandy have on the commodity markets.

By the time different agencies of the United States started to react to the calamity, commodity markets started to react as well. In this blog, we are going to see how commodity traders reacted to the calamity. Crude oil rose to about 4.2% after the Uncle Sam announced that he is expecting and is terrified about the expected arrival of Hurricane Sandy.

Why? Markets expected that oil refineries, especially the one in Bayway plant in Northern New Jersey, will be shut down temporarily and so there will be a fall in supply of crude oil. The expected fall in supply of crude oil led to price increase. We can see the surge clearly in Chart 1.

 Chart 1: Surge of Crude oil commodity

If you ask me, will there be commodity traders who would have made money out of hurricane Sandy, I bet. Someone’s loss is always someone’s gain. Table 1 clearly shows that hurricane Sandy that it did offer a hell-of-an investment opportunity to a lot of commodity traders. If someone has bought crude oil worth $1 Million, he could have made as much as $42000 in a day. It is tragic that the profit that these traders made is the loss born by consumers of different forms of crude oil.

  Table 1: Surge in crude oil (In %)

In a 3-day period, Surge of Crude oil (in %)	4.20%
Surge (in %) on an annualized basis	14824.71%

In cases of these natural calamities, how do commodity traders make money? All you need to know is how the supply chain is going to get hit. Then, it is pretty simple economics.   Buy the essential commodity as its price is going to rise.  

May be... There is free lunch

This blog is an analysis of how an investor who I know made money making a bet on the Chinese currency. 

Most people would be on my side if I say Chinese currency was valued way below its fair value. Also, there are economists who claim that China is being a currency manipulator.  This hot discussion has been going on for the past few years. My friend bought Chinese Yuan worth 1 Million US Dollars in March 2008 and sold it today.

Table 1: Business case

	In USD	In CNY
On March 2008	$1.00	CNY 7.45
He bought CNY worth $1 MM	$1,000,000.00	CNY 7,450,000.00
On October 2012	$1.00	CNY 6.25
He sold all CNY he had		CNY 1,192,000.00
Profit in the deal		CNY 192,000.00
Profit (In %)		19.20%
On an Annualized basis		4.49%

For people who have been following my blog, we have spoken about investments that offer a breakthrough return.  You could think that this is not really a noteworthy investment. But, it is. For all of you who have a decent understanding about macroeconomics and capital markets, there is 0% probability that Chinese yuan can weaken against the US Dollar (in the period 2008-2012). Chinese Businesses were strong, there was an increase in the spending behavior and there was an increase (since 2008) in both local and global demand for Chinese goods. On the other hand, USA was in a bad state in an economical perspective. Unemployment was higher than 8%, there was a decrease in local demand, there was a debt ceiling issue and there was a decrease in consumption of the USA. Given all of the above, I would say the risk of the above investment is negligibly low. On a risk adjusted return basis, this is an awesome investment.

I would argue that the risk involved in this investment is comparable to the risk involved on a 10-Year T-Bond. A 10-Year bond has less than 2% yield whereas our investment has more than twice the return from a 10-year T-Bond. Clearly, the investment we are talking about has a higher risk-adjusted return than most investment opportunities we get in the real world.

On the flipside, we don’t really get to see many opportunities like this. Watch the business world carefully. When you see these opportunities, go and take the free money.        

For beginner investors....

A friend of mine asked me a couple of general questions about investments. I felt my answer to those questions would be of interest to any beginner investor.   

First Question – Can small investors make money when there are insiders who may know this information way before it is released?

If you ask, “Can we even exploit investment opportunities?” my answer is, "I believe so”. Traders with insider information have chances of earning abnormally high profit margins. We can think that they are playing in a monopoly market. Whereas, any other investor may not have the ability to earn such high profit margins. However, every investor can invest intelligently and grab a good profit margin. Definitely, intelligent investors have the luxury to survive in the market and also grab good profits. 

Question 2 - Is it easy to make these bets?

I am going to try to answer this question based on my previous blog post, “Friendly takeovers as a Short term investment opportunity”. If you have not already read the blog, I would suggest you to read the blog.    

Trying to answer question 2, the ease of making these bets is directly proportional to your business savviness. If you know that, in the past years, Softbank has recording a profit and Sprint has been recording a loss and that Softbank is planning to buy a huge stake in Sprint, It should fairly easy to make this bet.

Friendly takeovers as a Short term investment opportunity

This blog is a continuation of my previous blog, ‘How to make a fortune out of hostile takeovers?’

Feel free to visit, http://vigneshrajan87.blogspot.com/2012/10/how-to-make-fortune-out-of-hostile.html.

In this blog, I am going to contrast hostile takeovers and friendly takeovers in the context of considering both of these as a short-term investment opportunity. Softbank Inc, a Japanese corporation, acquired 70% of Sprint. Sprint stock surged and Softbank’s stock went down.

In my opinion, friendly takeovers are a good investment opportunity. If we need to gauge that against a friendly takeover, it is less promising than a hostile takeover. I am making this argument primarily based on the Sprint-Softbank deal. This may not be the case in some historically prominent deals like AT&T-T-Mobile deal (Though it did not materialize).

Fig 1 & Fig 3 clearly shows that investors are not comfortable with Softbank’s decision to acquire 70% of Sprint. There are two prospective reasons for this discomfort. First, each common stock holders may have lesser stake in the company (in terms of % of the company that they own). It is less probable for this to be the reason.  Second, Softbank is acquiring a less profitable company (Sprint has recording a loss in the past years). I think this is the main reason for the drop in Softbank’s stock.

We can see from Fig 3 that Softbank stock has lost up to 23% on a daily basis and 6672% on an annualized basis.  We can make a great deal of money short selling the stock for a day or two. We can see the effect of investment behavior on October 16 as the stock starts to surge. This is nothing but a correction effect. Investors have pushed the stock really down and market is trying to rectify it. In this case, timing is another important factor. The time taken for the correction effect could vary with the company. In the case of Softbank, it took five days to correct the overreaction. As an investor, I would make a Safer bet by short Softbank’s stock for a day once the announcement is made by Softbank.  

From Fig 2 & 4, Investors of Sprint are really happy as the stock has surged up to 14% on a daily basis and 4679% on an annualized basis. Trying to explain the economics of the surge of Sprint’s stock, there is a higher demand for Sprint’s stock and so higher has become the price. Why? Sprint’s investors trust Softbank and they think Softbank is going to transform Sprint into a profitable company. Rest is investors’ behavior. The stock surged for about 5 days and then correction effect has started. As an investor, I would buy Sprint’s stock once the announcement is made and I will sell in about 24 hours from the time of announcement.       

Fig 1: Stock price chart of Softbank (TYO: 9984)

FIG 2: STOCK PRICE CHART OF SPRINT NEXTEL CORP. (NYSE: S)

FIG 3: Table showing stock price change in Softbank

DATE	Softbank (IN $)	CHANGE IN THE STOCK PRICE (IN %) SINCE 10/11/12	CHANGE IN THE STOCK PRICE   (IN %)    SINCE 10/11/12 (ANNUALIZED)
11-OCT	$37.10
12-OCT	$30.31	-18%	-6672.71%
15-OCT	$28.50	-23%	-2819.87%
16-OCT	$31.90	-14%	-1277.69%

 FIG 4: Table showing stock price change in SPRINT

DATE	SPRINT   (IN $)	CHANGE IN THE STOCK PRICE  (IN %)  SINCE 10/10/12	CHANGE IN THE STOCK PRICE (IN %)   SINCE 10/10/12 - ANNUALIZED
10-OCT	$5.07
11-OCT	$5.72	13%	4679.49%
15-OCT	$5.67	12%	1079.88%

How to make a fortune out of hostile takeovers?

I see hostile takeovers as a great short term investment opportunity. This idea is primarily driven by behavioral finance. Whenever a large organization or a billionaire investor tries to pursue a hostile takeover of another organization, markets over react to this message. Let me give an example: On October 11, 2012 Carl Icahn, the billionaire investor and activist pursued a hostile takeover of Oshkosh Corp.  From a stock price of $27.2, the stock bumped to $31 in a day and settled at a price $29.73 on the next day.      

  

Explaining the phenomena, investors expect a short term surge in the stock. There could be two reasons: First, they expect Carl Icahn to create a breakthrough in the organization. Second, they expect a surge in the demand for the organization’s stock after Icahn’s investment. 

There are two patterns that we have to notice. First, there is a surge in the Stock Price. Second, investors over react on the day the news is released. The return on 1-day and 2-day basis is 13.97% and 9.3% respectively. If we annualize this return it’s a crazy number which is clearly a fortune. If an investor invests $1 Million by buying the OSK stock he would make $139706 in one day. This is about five times the median yearly salary in the US.    

Fig. 1: Return estimated on 1-day, 2-day and annualized basis

Oshkosh Corp (OSK)	Stock Price
Initial Price (10/11/12)	27.2
1 day - high	31
2days	29.73

OSK	Daily Return	Annualized Return
OSK	Daily Return	Annualized Return
Growth - 1 day	13.97%	53625119998456700000000%
Growth - 2 day	9.30%	1120072008%

Fig 2: Stock price of Oshkosh Corp.