INVESTING STRATEGY Popular Approaches, Mechanical

Popular Approaches.

TMF PaulyPilot Cash Situations:

•Use a mechanical strategy to identify a shortlist.
•Look at the most recent accounts, and work ‘adjusted net assets’, calculated as
80% of freehold property, 100% of cash, 50% of debtors, and 20% of stock, less
all creditors.
•Read the most recent accounts and make an estimate for cash burn, and forecast it
out 6 months ahead, adjusting the net asset figure accordingly. Sort the
spreadsheet into descending order of market cap vs. adjusted net assets in 6
months time.
•Study the shortlist closely and weigh up the subjective factors. The best targets
are ones where the business is so obviously a crushing failure that nobody in their
right mind would seriously want to continue supporting the business. That makes
it a softer target, since management will probably be demoralised.
•Smaller, uncomplicated businesses are to be preferred - ones which have few
ongoing liabilities (important to check out leasehold liabilities in notes to
accounts), and preferably with few staff (under 100 where possible), since
redundancies will then be quick and cheap.
•Businesses where management have large shareholdings, although harder to
bully, are more likely to act in shareholders interests, and use the MBO route.
•Try to avoid any company with less than £5m net cash, as these are too risky.
Some unexpected large cost will take a much higher % of the cash away than for
a business which has say £10-20m cash.

Risers and Fallers:

Risers:
• Monitor the top ten risers.
• Identify companies that has benefited from positive news.
• Select share that has risen between 5% and 10% by 8.30 to 9 am.
• Sell around 4.20 pm.

Fallers:
• Monitor the top ten fallers.
• Identify a company that has dropped by 10% or more for reasons outside its
control, or where a possible over-reaction has taken place.
• Purchase around 4.15pm before the price rises.
• Sell before the end of the following day.

Trading Volumes:

• Ignore big companies with volumes of around 50 million shares.
• Select smaller companies with significantly increasing volumes.
• Increasing volume might indicate the possibility of a share suspension. This
usually applies to unknown small companies. Watch out for well-known people
becoming directors.


Directors’ Dealings:

• Look for sizeable transactions which amount to 10% of the Director’s resultant
holding.

• Select companies where Directors have a sizeable stake.

• Dealings by CFOs, Executive Chairmen and Chief Executives are most
significant. Several Directors buying in unison is more significant.

• Insider buying with a rising share Price.

• Directors’ dealings just before the Closed Period – 2 months before an
announcement – may have increased significance.

• Some selling may merely be to improve liquidity.

PP Takeover Targets:

Look for:
•A share in which another company owns a large shareholding e.g. 30%

•Assets worth considerably more than its share price. Low P/BV

•Low capitalisation making it suitable as a ‘shell’ company

•Low PE compared to its competitors so that a rival could take it over and lower its
PE

•Undervalued brand names/subsidiaries that could be sold off profitably

•Elderly Chairmen or Directors

•Companies that have fallen on hard times, which have undergone restructuring
and are on the point of a turn-round but which has not yet been recognised in the
share price

•A would-be bidder testing the market by buying and selling the shares over a
period. Look for rises and falls and a rising price higher than before

•Persistent rise in share price especially if it is against the market or
company trend

•Cash rich companies

•Low Debt/Equity Ratio

Takeovers – The Superstock Investor ( LaLoggia and Mahon):

http://www.amazon.co.uk/Superstock-Investor-Profiting-Undervalued-
Companies/dp/0071360832/ref=sr_1_1/202-7523631-
9877467?ie=UTF8&s=books&qid=1178999840&sr=1-1

The key to this approach is interpreting the news for telltale signs. A super stock has the potential to rise significantly in price regardless of what the general stock market is doing.

Catalysts:•
Usually a takeover bid.
• A massive partial stock buyback at a premium.
• A large one-time cash or stock dividend, where a company distributes
accumulated cash or shares in a wholly owned subsidiary to its shareholders.
• A spin-off.

They are the logical conclusion to a series of interrelated developments that, when
properly noticed and analyzed, can clearly point the way to many takeover bids that seem very unpredictable to outside observers.

Action:

•One of the strategies to identify a potential takeover target is to monitor
stocks in takeover-lively industries that are acting suspiciously well relative
to other stocks in the industry or relative to the stock market in general.

•Look for no debt and plenty of cash - these cash-rich, low-debt companies tend to
lag behind the market due to a lack of analytical support.

•Pay particular attention to those who talk about ‘growth through acquisitions’.

•Take note of every large merger announcement you see, and pay particular
attention to the reasoning behind that merger.

•Get a list of the top 10 to 15 companies in that industry and zero in on those with
little or no debt and high cash and/or working capital relative to their stock
prices,on the theory that a merger trend in motion tends to stay in motion and
that once a large merger has occurred in an industry, more will inevitably follow.

•Take note of every merger that falls apart, on the theory that the buying company
will look around for another target.

•Take note of situations where two companies are trying to acquire the same
target, on the theory that only one of them can win the prize, and the company
that loses out will eventually look around for another company to buy.

•Make a note of every outside company that is raising its stake in another company
through open-market stock purchases.

•Take notice of every company that announces a stock buyback of 5 percent or
more, and put a red circle around those that operate in industries where a great
deal of takeover activity has occurred.

•Make note of every company that enacts a ‘Shareholder Rights Plan’ designed to
make a takeover more difficult.

•Make note of every company in a consolidating industry where 10 %+ of the
stock is held by a brokerage firm, a buyout firm, or an investment partnership that
does not maintain long-term investments in the normal course. The theory behind
this is that a sophisticated stockholder will recognize the opportunity to maximize
its investment and will act as a ‘catalyst’ for a takeover bid.

•Take note of companies selling or spinning off non-core operations, especially
when the parent company or the spin-off operates in an industry where takeovers
are occurring, because such corporate restructurings often precede a takeover bid.

•Finally, subscribe to a service that presents charts organized by industry group.
These enable you to see at a glance if a particular stock in an industry group is
suspiciously outperforming its peers—often a sign that some sort of takeover
development is brewing.

Value:

Where does the stock price come from?

•earnings expectations and ii) the present value the market is willing to place on
those earnings expectations.

What causes Price/Earnings ratios to shift so dramatically?

•The major determining factor is interest rates. When interest rates rise,
price/earnings ratios tend to fall. When interest rates decline, P/E ratios tend to
rise. In other words, as interest rates on less risky investments rise, a certain
amount of money will leave the stock market to lock in that return.

What is Discounted Present Value?

•Discounted Present Value estimates what a future earnings stream is presently
worth. High interest rates will result in the present value being lower, while low
interest rates will result in present value being higher.

What is a ‘value’ stock?

•A ‘value’ stock is one that sells at discount prices, significantly below its
value as a business, where there is a reasonable possibility that someone will
step up and offer to pay that value, thereby forcing the stock market to reflect
that value in the stock price. The evidence seems to indicate that the stock market
is a good ‘discounting’ mechanism that takes into account everything that is
knowable at any given time. The only way for an individual investor to get
an ‘edge’ is to go off the beaten path and focus on areas of the market where
analytical attention is slim or nonexistent.


•Research individual stocks and do not try to predict the market or compete with
analysts tracking the large-cap stocks.

•Much valuable public information is available that is not reflected in stock prices,
especially small-caps that are not widely followed.

Signs to Watch for:

•In a creeping takeover, the outside owner progressively adds to his stake in the
potential target company by purchasing shares on the open market. If the outside
beneficial owner continues to purchase large blocks of stock on the open market,
it is a strong indication that there is good value at those price levels.
If the price declines, the outside beneficial owner tends to go into the open
market to purchase more shares, thereby supporting the price.

•A triple play occurs when an outside beneficial owner, the company itself, and its
corporate officials (insiders) are all buying stock on the open market. This is just
about as good as it gets in terms of identifying a severely undervalued stock that
is going to go significantly higher.

•Even when you clearly spot the Telltale Signs that an event is about to occur that
will drive up the price of an undervalued stock, you may have to be very patient.

•You should also take a close look at stocks where an outside beneficial owner has
indicated a desire to sell. Companies that sell or spin off ‘non core’ operations
are often preparing to sell themselves to a larger company as a pure play.

•One of the tricks to picking genuine takeover candidates is to look for companies
that are already partly owned by other companies and have demonstrated they are
in an acquisition mode. When a company whose stock is being bought by a third-
party ‘beneficial owner’ announces a stock buyback, it is usually a strong signal
that i) the company is worried about a takeover, and ii) the company believes its
stock is severely undervalued and the potential acquirer will attempt a low bid
that might be above the current market price but still below the true value of the
company.

•When the ‘hot’ money sells to move into something temporarily more exciting, it
creates buying opportunities in the genuine takeover candidates for those with the
insight, foresight, and patience to take advantage of these opportunities.

•Browsing through charts with no particular stock in mind can often lead you to
notice a potential super stock chart pattern. Create your own list of potential
take over andidates.


Eighteen Telltale Signs:

1.An outside company or individual accumulates more than 5 percent of a
company’s stock.

2.A company, which already has one outside ‘beneficial owner’, attracts a second
or even a third outside investor who accumulates a position of 5 per cent of more.

3.An outside beneficial owner says that he is seeking ways to ‘enhance shareholder
value’, ‘maximize shareholder value’, or speak to management/other shareholders
about ‘exploring strategic alternatives’. All are code for potentially putting a
company up for sale to get the stock price higher.

4.An outside ‘beneficial owner’ pays substantially more than the current market
price of the stock in a private transaction with the company to establish an
initial position or increase its stake, or agrees to provide services or something
else of value to a company in exchange for an option to purchase shares where the
option’s exercise price is substantially higher than the current market price of
the stock. This is often a strong indication that all parties involved see
substantially higher values ahead for the company and its stock.

5.An outside beneficial owner adds to his stake in a company through additional
open market purchases of its stock.

6.An outside beneficial owner expresses an interest in selling his stake in a
company and says it will review strategic alternatives—often code for a desire to
have the target company acquired by a third party to maximize the value of the
beneficial owner’s investment.

7.A dispute between an outside beneficial owner and the company, in which it owns
a stake, breaks out into the open—often a signal that a battle for control of the
company is underway.

8.A company, in which an outside beneficial owner holds a stake or is accumulating
additional shares and/or which operates in an industry where takeovers are
proliferating, announces a stock buyback programme.

9.A company, in which an outside beneficial owner holds a stake or is adding to its
stake, is the subject of insider buying by its own officers and/or directors.

10. A company, with an outside beneficial owner and/or operates in an industry
where takeovers are proliferating, announces a ‘shareholder rights plan’ designed
to make a hostile takeover more difficult.

11. A company in a consolidating industry sells or spins off ‘non core’ assets or
operations, thereby turning itself into a ‘pure play’, which is often a signal
that the company is preparing to sell itself to a larger company within its core
industry.

12. A company in a consolidating industry takes a large ‘restructuring’ charge - in
effect putting past mistakes behind it and clearing the decks for future positive
earnings reports. Such action can be important to a potential acquirer and is
often a sign that a company is preparing to sell itself
13. A company in a consolidating industry announces a restructuring charge that
causes the stock to decline sharply and becomes the subject of significant
insider buying and/or announces a stock buyback. This is usually a sign that the
stock market is taking a short-sighted, negative view of what may actually be an
early clue that a takeover is on the horizon.

14. A company in a consolidating industry is partially owned by a ‘financially
oriented’ company or investor, such as a brokerage firm or buyout firm, that
has a tendency to buy and sell assets and that would be ready, willing, and able
to craft a profitable ‘exit strategy’ for itself by engineering a takeover of
the company in question, should the opportunity present itself.

15. The founder of a company who owns a major block of stock (10 %+) dies. This
type of situation often leads to a desire by the estate to eventually maximize
the value of the stock—in other words, a desire to have the company acquired.

16. Two or more bidders try to acquire a company in a certain industry, resulting
in a bidding war. Since only one of these bidders can be a winner of the target
company, there is a good chance that the losing bidder will look elsewhere for
another acquisition target within the industry. In a case like this, you should
browse through other companies within the industry looking for one or more of
the Telltale Signs.

17. A small-to-medium-size company in a consolidating industry achieves a breakout
from a ‘super stock breakout pattern’; i.e., the stock penetrates a well-defined
resistance level at least 12 months in duration following a series of
progressively rising bottoms or support levels, which indicates that buyers
are willing to pay increasingly higher prices to establish a position. This
pattern creates the appearance of a ‘rising triangle’ on the chart. The best
super stock breakout patterns occur when volatility decreases markedly in the
weeks or days prior to the breakout.

18. A company that owns a piece of another company is itself acquired. Many times,
it can pay dividends to look into a situation where a stake in one company is
‘inherited’ through a takeover of another company. Often, if Company A acquires
Company B, which, in turn, owns a stake in Company C, you will find that
Company C becomes a takeover target in one of two ways: i) Company A may
eventually bid for the rest of Company C if this fits its overall
business/acquisition strategy or ii) Company A may sell off the inherited stake
in Company C to a third party, which then bids for the rest of Company C. A
takeover of a company whose stock is ‘inherited’ through another takeover
becomes even more likely when there is already a business relationship between
Company A and Company C.