Trina Solar (TSL)

Interesting case written up on BofC. Its a going private transaction that will result in all ADR holders getting 11.55 per ADR. The current ADR price is 9.3. And the merger itself is expected to happen within Q1 of 2017. The merger has also received approval from shareholders. So now the real question is whether the terms of the merger will be altered or whether they will be able to raise the capital.

The market is assigning a implied probability of the merger going through of about (9.3-8.25)/(11.55-8.25)=32%. The formula I used is p=(S-L)/(U-D) where p is the probability of the merger, S is the current stock price, L is the stock price just prior to the merger announcement (I am assuming the stock returns to this value if the merger does not go through) and U is the merger stock price.

The IRR of the deal if it goes through is 1.25^4 – 1 = 144%.

Investors Overpay For Catalysts

Today I was on Berkshire and Fairfax and looking at a thread for the stock Surge Components (SPRS). The stock was cheap by any metric. And the company is tiny.

There was a little debate on the thread about why people don’t invest in stocks like this but instead are drawn to large caps which are vastly more difficult to analyze and where there tends to be much more competition for other investors. Its not uncommon for a thread on BofC to go to 300 pages on large caps like Sears or Valeant. And more than half the time these investments are losers.

And I believe that it basically comes to one thing that investors are totally unsure when the value of these small stocks will be realized. Its not uncommon for these stocks to trade at low levels for long periods of time. There is almost no news on them. In other words there is no obvious catalyst.

Investors however are attracted to catalysts. Growth itself is a catalyst. But so are spinoffs, restructurings, mergers, activist involvement. Now I think all these catalysts are worth something but my general observation is that investors tend to overpay for them. The problem is usually that the investor assigns a probability of 1 to a catalyst that is really more like 0.6. They expect everything to work out but it often doesn’t.

The small illiquid underpriced stocks are the counterpart to this. The languish often for years before something happens. In the case of SPRS, activist forced a sharebuyback and and independent director onto the board. The stock has since increased about 50% but I expect it will be at least a double after the share buyback. The interesting thing is that the catalyst was not part of the original investment case.