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* See below for important additional information about this chart.
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Greetings!
- Facebook's IPO went poorly, but the social network's woes may work to your benefit
- ArbitrOption is superior to any growth investment you're considering
- A new Edward Jones survey found that 62% of Americans have "no idea" what a 529 college savings plan does
- Wolverine's acquisition of Collective Brands provides a good example of ArbitrOption's strategy in action
Welcome to the ArbitrOption May Newsletter, a double issue!
- Heath |
| About ArbitrOption | |
ArbitrOption Capital Management is an independent wealth management firm that focuses on helping clients realize their financial goals and aspirations. The firm applies its proficiency in research and trading of event-driven situations to target asset growth that minimizes investment risk on behalf of clients. All investment advisory services are provided through ArbitrOption Capital Management, LLC, a registered investment adviser. For more information about ArbitrOption, please visit www.ArbitrOption.com.
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| Facebook's Woes May Work to Your Benefit |
Facebook, a company with 900 million users and $1 billion in 2011 income, opened itself to partial ownership by the public this month. As I'm sure you've read, the stock opened at $38 per share, traded up to $43, and promptly fell back to $38 on its first day. Since then, Facebook stock has declined to prices below $27 per share.
There are two substantial problems that Facebook encountered which you, as a buyer of stocks, need to be aware of:
1) Nasdaq was not able to maintain an orderly market, the most basic service that it is obligated to provide as an exchange
2) Morgan Stanley's process for selecting the $38 IPO price could at best be called an educated guess
As a stock exchange, Nasdaq earns a tiny fee from every transaction that it enables. In order to justify those fees, Nasdaq makes commitments to its listed companies and its shareholders that it will provide a marketplace where company stocks can be bought and sold. Despite tremendous indications of interest from the public and the opportunity to have input into the IPO date, Nasdaq failed to prepare sufficiently to allow it to bring off a successful IPO. This is worrying because it reveals an enormous weakness in our financial markets -- Nasdaq is unreliable, even with substantial discretion over how long it has until it must demonstrate its reliability.
Of all the available processes for determining a valid IPO price, the one used by Morgan Stanley was the worst. To quote from Facebook's Registration Statement (emphasis added):
Subsequently, in mid-May 2012 we increased the anticipated initial public offering price range to $34.00 to $38.00 per share. The assumptions supporting the revised anticipated initial public offering price range represented management's best estimates and discussions between us and the underwriters about indications of interest from potential investors after approximately one week of marketing of the offering, and involved complex and subjective judgments.
Morgan Stanley could have recommended that Facebook hold an auction for its IPO, as Google did. Alternatively, Morgan Stanley could have made available the research that it produced to support a $38 price for its forecasts of Facebook's future cash flows. Even a simple comparison of P/E ratios for Facebook peers in the Registration Statement would have been better than relying on indications of interest. The flaws in the processes that are used by investment banks to determine the price at which private companies should be brought public have been widely discussed. I'm just impressed that the banks manage to continue getting paid for performing so poorly.
But how do these problems work to your benefit? You're forewarned! If you choose to participate in an IPO, you know very well now that it's critical you carefully evaluate what that company is worth. It's been clearly demonstrated to you that relying on the "professionals", like Nasdaq and Morgan Stanley, is extremely risky. Facebook's woes help to serve as a wakeup call for anyone who chooses their own stocks -- you can use Wall Street's opinions to inform yourself, but you can't assume that they know any better than you do.
Click on the image of the Facebook logo above to go to Facebook's website.
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ArbitrOption is Superior to Any Growth Investment You're Considering
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"Growth" investments are designed to be held long-term and increase in value over time. "Income" investments are designed to have lower volatility and throw off cash for income, usually through dividends. ArbitrOption's event-driven investment strategy is a growth investment that provides a number of advantages you're unlikely to encounter anywhere else.
With ArbitrOption Capital, you get direct access to the person who is managing investments for your account. Calling the T. Rowe Price New Horizons fund, Wells Fargo Advantage Growth fund, or AllianceBern S/M Cap Growth fund will not get you access to the the Portfolio Manager in charge the way you can get access to ArbitrOption.
An ArbitrOption Capital account is your brokerage account, which means that you have control over decisions to move cash into or out of the account. Your money is safe.
ArbitrOption's historical returns dwarf those of its peers. Bearing in mind that historical performance is not an indicator of future returns, the duration and trend of ArbitrOption's investment returns (seen in the chart above) are very impressive.
Lastly, ArbitrOption's management fees are among the lowest you can pay to gain access to an event-driven investment strategy. At 2% per year, the cost of hiring ArbitrOption to manage a portion of your money is extremely low.
Please call or email to talk about how ArbitrOption fits into your investment plan.
Click on the ArbitrOption logo above to learn more about opening an account. |
62% of Americans Have "No Idea" What a 529 College Savings Plan Does
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Earlier this month, Edward Jones contacted over 1,000 adults to assess American's familiarity with college savings plans. Unfortunately, the survey found that:
62% had "no idea" what a 529 college savings plan means. And they even had multiple answers to choose from including "a form of life insurance" or "a college savings plan." Another 14% just gave up and admitted they simply didn't know.
Given that tuition costs at the average 4 year public college jumped 8% from 2010 to 2011, a tax-advantaged 529 plan could be a potent tool to help reduce or eliminate the need for student loans. Click here to see the top 7 benefits of 529 plans, as compiled by savingforcollege.com. Click on the Edward Jones logo to read more about the 529 survey results. |
| Wolverine's Acquisition of Collective Brands Provides a Good Example of ArbitrOption's Strategy |
Collective Brands (PSS) is one of the companies that ArbitrOption added to its portfolio this month. The firm sells shoes and apparel through three lines of business, the largest of which is Payless ShoeSource. On May 1st, Collective Brands announced it would be acquired for $21.75 per share by Wolverine World Wide, a producer of a casual and performance footwear. Collective Brands' stock had closed at $20.77 on the previous trading day, such that the takeout premium was only 4.7%. It's worth mentioning that Collective Brands initiated a review of strategic alternatives back in August, 2011, with the stock at $10.66.
Wolverines' buyout is conditioned on shareholder and regulatory approvals; committed financing for the transaction has already been secured. Collective Brands indicated at the time the deal was announced that it expected to complete the transaction in the third quarter of 2012. ArbitrOption uses a 60 day guideline to calculate an expected timeframe from the filing of the preliminary proxy statement to the date of the shareholder vote. Similarly, the expected time frame for an antitrust review for a transaction such as this, with neither company identifying the other as a competitor, is 30 days from the filing of an application. Based on currently available information, including the fact that neither a preliminary proxy nor the antitrust filing have been made by the end of May, my best guess is that the $21.75 buyout will be completed by the end of September.
And now to options: Collective Brands has call and put options that expire on September 22, December 22, and January 19. The September expiration is worryingly close to when the deal is expected to close, but December and January could work out. Fortunately, the options have single-dollar strike prices, so that it is possible to buy the December $21 call option and sell the December $22 call option. This option pair will be worth $0.75 if the deal is completed by December 22nd. A pair like this can usually be purchased for $0.65 ... which would produce a 15% return-on-risk if the investment is successful.
Click on the Collective Brands logo to visit Collective Brands' website.
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Heath Winter is Managing Partner of ArbitrOption Capital Management, LLC. For more information, or to be added to this newsletter's distribution list, write to [email protected].
* The chart above reflects the performance of the ArbitrOption strategy in a proprietary trading account. The funds in that account are not subject to the trading restrictions of retirement assets. The funds in that account receive 100% leverage. All figures are ex-trading costs, net of a hypothetical 2% annual management fee (deducted monthly), and unaudited. The Dow Jones Credit Suisse Event Driven Risk Arbitrage Hedge Fund Index is an asset-weighted blend of the net-of-all-fees performance of eight risk arbitrage hedge funds. The list of the index's constituent funds can be seen at www.hedgeindex.com. ArbitrOption and the constituent funds of this index use similar research methodologies to invest in similar risk arbitrage value opportunities, albeit with different trading tactics and risk management techniques. The investment strategies of this index's constituent funds may or may not include special situation investments, and may not invest in special situation opportunities to the same extent as the ArbitrOption investment strategy. The trading strategies of this index's constituent funds may or may not employ options, and may not use options to the same extent as the ArbitrOption strategy. The Dow Jones Credit Suisse Event Driven Hedge Fund Index is an asset-weighted blend of the net-of-all-fees performance of seventy event-driven hedge funds. The list of the index's constituent funds can be seen at www.hedgeindex.com. ArbitrOption and the constituent funds of this index use similar research methodologies to invest in similar event-driven value opportunities, albeit with different trading tactics and risk management techniques. The investment strategies of this index's constituent funds may or may not include risk arbitrage investments, and may not invest in risk arbitrage situations to the same extent as the ArbitrOption investment strategy. In addition, the trading strategies of this index's constituent funds may or may not employ options, and may not use options to the same extent as the ArbitrOption strategy. The S&P 500 index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% of the market capitalization of U.S. equities. The index is therefore broadly representative of the performance of the U.S. equities market. This information is provided for educational purposes only. It does not constitute investment advice. It is not our intention to state, indicate or imply in any manner that ArbitrOption's current or past results are indicative of its future results or expectations. As with all investments, there are associated risks and you could lose money investing. Prior to making any investment, a prospective investor should consult with her or his own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment to their personal financial circumstances. |
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Heath Winter, MBA |
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