Abbott Labs

I had originally put out a post on Abbott labs about 2 year back when I added it in my portfolio. The link is enclosed below.

http://investingvalues.blogspot.com/2008/05/stock-idea-abbott-india.html

I had bought it around the Rs 540 mark when the markets were around the 16500 range. The stock ended today at 1134 with the index at 17,400 levels. Along the way I sold about 50% of my holding around the 735 mark and continued to hold the rest.

So on a like to like comparison Abbott has delivered me over 110% return as compared to the Index which delivered about 4% in the same period. ( I haven’t factored in the dividends that came thru and the share buyback that took place).

Thought process

1) My original premise on Abbott was the fact that it was a great business with high ROE and throwing out surplus cash every year. Though there are other pharma companies with a similar structure, what I liked about Abbott was the fact that the parent globally had a philosophy of returning cash back to shareholders in the form of dividend or share buybacks which made it more attractive as a holding.

2) I also along the way anticipated that the parent which was generating surplus cash would direct that surplus cash into acquisitions with a greater focus on emerging markets. Abbott acquired Solvay and followed up with its current acquisition of Piramal Healthcare making it the largest pharma company in the country.
The market has of course carried out a round of PE re-rating and assigned it a PE in sync with large MNC pharma companies from the tier 2 pharma company PE that it was getting.

Doesn’t all of the above make me sound like a great analyst?

I want to bring here the interesting concept of “Hindsight Bias”. To quote Wikipedia “Hindsight bias is the inclination to see events that have occurred as more predictable than they in fact were before they took place”. Simply put we believe that we predicted or were prepared for event that have happened in the past. Invariably most people will recognise hindsight bias when something goes wrong. For Ex Most people will tell you that they knew that the sub prime crisis was waiting to happen.

The real challenge of hindsight bias to recognise it when something goes right for you. For ex In Abbott’s case my hypothesis was based on point 1 of the thought process that I have listed above.

Point 2 of how I predicted that they would be acquiring companies in India and become the largest pharma company in the country is complete hogwash and a attempt at making me look very intelligent and insightful.

So the return that the stock generated from about Rs 540 to about Rs 725 was my stock picking skills but the return from there onwards to 1100 bucks is pure luck :-). But then I m not complaining.

I though however believe in a concept which I call “ Positioning for luck”. Will write a separate post on that.

Nowhere Man

After my previous post on women and investing, I must admit there is one woman beyond my wife that I observe everyday. She is my daughter who is currently three years old and hence, the boss of the house :-).

Is there something to learn from observing her?

If u have a child around the same age or maybe + 2-3 years you will observe a interesting phenomenon. The child has infinite amount of physical energy. It is extremely difficult to restrain the child in a given place or position beyond a few seconds. She is in a constant state of physical motion with arms flaying and legs moving. Try getting a child to do nothing for 10 minutes and u will accept defeat even before you start the task. Getting her to stand still beyond a few seconds is a non starter. It’s like Brownian motion

So the point is

I want to quote Blaise Pascal here. The man I disliked in my engineering days for giving us hydraulics but the man who came up with very interesting insights in human behaviour.

“All human evil comes from a single cause, man's inability to sit still in a room”.

Like the child we crave for activity. Maybe not physically but our brain never stops. It wants action, wants to be in the thick of action and if not anything create action where non exists. The itch to put in the next trade or buy the next stock that you analyse.

And like the child, it really is not in control of its actions.

I have been in the last 15 days working hard to do nothing :-). Caught up on some reading, steered clear of annual reports and spent time thinking.

The title of this post of course comes from a nice song by The Beatles

Nowhere Man

"He's a real nowhere man,

Sitting in his Nowhere Land,

Making all his nowhere plans

for nobody"

Post on Stockshastra

Stockshastra which is a new initiative by Moneyworks4me with the objective of providing timeless principles of stock investing had invited me to participate in a blog carnival tittled " How I arrived at my style of stock investing".

I was in my writing moods so wrote a slightly different post. The link is attached below.

http://stockshastra.moneyworks4me.com/guest-articles/ninad-kunders-style-of-stock-investing/

Time to attain rationality

I had earlier posted about a trade that was carried out in Britannia industries where the company issued bonus debuntures and the markets mispriced the stock post the record date giving reasonable returns in the time frame that the trade was carried out. The link to the post is enclosed below.

http://investingvalues.blogspot.com/2010/04/britannia-bonus-debentures.html

I had a round of email exchanges with a friend whose bone of contention or query was

How do u that the market will misprice when u initiate the trade? Is it just experience or a element of probability or pure luck?.

I am attaching the email response that I had sent him …

The starting point in a trade like this is to ensure

1) The market risk is very low which is to time the trade very close to the actual event date or the record date.

2) More importantly - valuation comfort. If everything else goes wrong are u still comfortable holding the stock from a valuation standpoint.

Without valuation comfort the trade is a strict No go.

Lets look at the markets are irrational part. True markets do turn irrational at times but i want to inverse that statement. Markets are not rational all the times which is not saying that they are irrational but they take time to reach a level of rationality. I dont know whether I am able to spell out the subtle difference by inversing that statement. The time that market takes to attain that rationality is the time window that a arbitrageur gets for the trade.

So it comes both from experience/ insight and probability. The market has diff kinds of participants day traders, arbitrageurs, tech analysts, long term investors who look individually look at diff information points so at a given point a participant would not have not digested all the news points. For ex If i am buying a stock from a long term objective i might not have look at the technicals ( i anyway dont believe in technicals) and vice versa. So not all participants would have digested a particular corporate action. If it is a bonus or a dividend then most participants would digest it but other corporate actions which have a element of complexity dont get digested as fast.

This is more true in the midcap/ small cap segment which is under researched and uder tracked. If HLL had done a similar exercise i would doubt the arbitrage window would have existed.

 It isnt risk free by any stretch of imagination. Its just about how much risk can u eliminate and dont get into a situation of picking pennies in front of a roadroller.

Trust that could add some value.

Cheers
Ninad

PS: Remembered a interesting exchange from Alice in Wonderland
Alice: But I don't want to go among mad people.
The Cat: Oh, you can't help that. We're all mad here. I'm mad. You're mad.
Alice: How do you know I'm mad?
The Cat: You must be. Or you wouldn't have come here.
Alice: And how do you know that you're mad?
The Cat: To begin with, a dog's not mad. You grant that?
Alice: I suppose so,
The Cat: Well, then, you see, a dog growls when it's angry, and wags its tail when it's pleased. Now I growl when I'm pleased, and wag my tail when I'm angry. Therefore I'm mad.

HSBC Investdirect - Exit

This one worked out better than I expected. I had earlier posted on the delisting opportunity of HSBC Investdirect. The link is enclosed below

http://investingvalues.blogspot.com/2010/04/hsbc-investdirect-delisting.html

As the book opened for delisting the initial bids came at the Rs 350 mark. The markets promptly anchored to this price and the stock ran up from the 300 band to a high of 335 yesterday. I promptly exited my position at a average rate of Rs 328 without waiting to find the delisting price. Afterall there is a huge risk that the 2 large players Mathews and Deutsche could tender it at a price lower than 350. This was better than my initial expectation of delisting in the 315-325 mark.

This transaction delivered me a return of 41% on my original investment in a 3&½ month period and about 16% on the second tranche of my investment in a months time.

Off to searching newer opportunities which are becoming very scarce with the run up in stock prices.

Breaking (Zee) News - Demerger

There was breaking news of a different variety in Zee news. Zee News went through a scheme of arrangement involving demerger of the General entertainment channels from Zee news and merging them into Zee entertainment.

The shareholders of Zee news as per the arrangement were eligible for 4 shares of Zee entertainment for every 19 shares held in Zee news. They would continue to hold the news business in Zee news.

We tracked the deal from the initial announcement stage and monitored the price movement at every milestone. Find below the various milestones and the cost of creating the residual Zee News

The record date for the transaction was set for 16th April. Arpit had arrived at a fair value for the Zee news share in the Rs 9- 10 bracket.  Post the ex date the market traded the stock in the Rs 18-20 price band and there was clearly returns to be made on the deal.

This however is with the benefit of hindsight. I never invested in this deal as there was clearly time risk involved with no clear timelines on when the court order could come thru. Though I think there was a opportunity just after the court approval came thru. It was a interesting transaction to monitor in terms of price movement at every milestone.

But once in a while it is ok to be a spectator and stay away from the news :-)

HSBC Investdirect - Delisting

I had created this note on HSBC Investdirect's delisting around end of January 2010. I had also invested in the stock around the same time.

I have a history of investment in this particular counter betting originally on the delisting happening. Links to those post are enclosed below.

1) This was betting on the delisting in Nov 2008.

http://investingvalues.blogspot.com/2008/11/dabur-pharma-il-investmart-two-to-tango.html

2) Subsequent posts when the delisting got announced and my exit

a) http://investingvalues.blogspot.com/2009/06/il-investmart-bingo.html

b) http://investingvalues.blogspot.com/2009/10/long-hiatus.html

The note that I had written in Jan 10

Opportunity Type - Delisiting

Company: HSBC Investdirect

Exchange - BSE

CMP - Rs 231

Equity Base – 70.39

Current market Cap - 1626

Public shareholding – 6.89%

Free float - 112 crores

HSBC InvestDirect was originally floated by the ILFS group and was called ILFS Investmart.

Historical Milestones

• HSBC acquired IL&FS Investmart from the IL& FS group and acquired 73.21% stake by a share purchase agreement.

• It subsequently made a open offer to acquire 20% of the shares by its letter dated May 20th 2008 at a price of Rs 200.

• On completion of the open offer HSBC raised its stake in the company to 93.86%.

• Having acquired 93.86% stake which is higher than the listing agreement, HSBC had to either dilute stake below 90% or initiate the delisting process.

• Company name changed proposed from Il&FS investmart to HSBC Investdirect by a board resolution in April 2009.

Delisting Milestones

• HSBC initiated the delisting process on June 16th 2009 on receipt of a letter from the promoters to initiate the delisting process.

• Notice of postal ballot for shareholder approval was despatched on June 26th 2009

• Result of postal ballot with the approval of shareholders was acquired on July 28th 2009.

Milestones Pending

• Filing with exchanges for delisting approval. - Approval process takes 15 days post filing.

• Initiation of reverse book building process for arriving at the delisting price - Process takes one month post receipt of approval from exchanges

• Acceptance of the delisting price and despatch of acceptance amount - 15 days post the reverse bookbuilding process.

Current Holding Structure

Company - HSBC InvestDirect

Promotor – HSBC group - 93.86%

Public

Mathews Fund – 2.05%

Deutsche Mutual Fund – 1.21%

Other public shareholders - 2.88%

Delisting Laws

There are two important criteria in the delisting laws

• The promoters have to acquire a minimum of 50% of the public shareholding when arriving at the reverse bookbuilding price.

• The promoter stake should go above 90% post the delisting process.

In the case of HSBC Investdirect, the stake of the two institutional holders would be sufficient to cover for the 50% criteria. HSBC anyway holds more than 90% of the stake to fulfil the other criteria.

Deal Analysis

In any special situation case there are three important risk to be ascertained.

1) Price Risk - Deutsche mutual find which is one of the large shareholders had acquired its stake post the delisting announcement in the 260-270 price band. That effectively creates a floor for the delisting price. Our estimate is that the delisting price would be in the 315 -325 mark.

2) Time Risk - HSBC has to complete the entire process within 12 months of the board resolution which will expire in June 2010. So effectively we have about 4 months as the outside time limit on the deal.

3) Deal Risk - The delisting process has got delayed so far because with new SEBI amendment in the takeover code the company has to extinguish all convertibles like GDR’s, ESOP’s etc before it carry’s out the delisting process. The company has existing Esop’s which need to be extinguished and hence there has been a delay in the process. Our understanding post talking to the company secretary and the merchant banker is that they would be able to manage the timeline.

Return Matrix

Scenario 1 - Exit thru Bookbuilding Process

Current market Price – 231

Exit Price – 325

Period ( months ) – 4

% Absolute return - 40.7%

Scenario 2 - Exit prior to bookbuilding Process

Current market Price – 231

Exit Price – 280

Period ( months ) – 2

% Absolute return - 21.2%

Current Update

The company has managed to overcome the ESOP hurdle and made the public announcement on the delisting schedule. The reverse bookbuilding is to open on the 28th of April and will close on the 5th of May. Post the PA the stock jumped from the 230-240 band that it was trading at to the 280-285 band. I bought some additional position ( thought my major position was built in the 230-240 range) at the 281 mark factoring in the clear timelines and my expectations of 6-7% return from here in a months time.