value and opportunity

Two months ago I looked briefly at CIR SpA ( or more precisely an analysis on beyondproxy), the Italian holding company which had the following special feature:

CIR carries a €564 million liability that has been booked as “Borrowings”. In reality, this is not borrowed money – it is a legal reserve for an infamous legal proceeding that has been making headlines in Italy for the past twenty years: the so-called ‘Lodo Mondadori’.

At that time the share price was around 95 cents. According to my analysis, the fair value of the shares at a 480 mn settlement would be around 1.12 EUR per share.

I wrote the following:

Although I like the unique aspect of this special situation, the potential upside is NOT attractive enough to justify an investment at current prices.

I will keep this on the radar but I would not invest above ~0.70 EUR. I would need 50% upside in order to justify the risk of the underlying companies which are clearly struggling.

Yesterday, the Italian top court finally decided that Berlusconi has to pay 500 mn.

The CIR stock then jumped to a price of 1.20 EUR,which over this 2 months would have been a nice gain of over 25%.

The question I am asking myself is: Was this a typical level 3 investment mistake, analysing a company but rejecting it and maybe even forthewrong reasons ?

If we compare the CIR share price with the two listed subsidiaries SOGEFI and Espresso, we can clearly se that the CIR share reacted mostly to the ruling, this wa not a fundamental revaluation o the businesses, although Espresso performed similar:

I am especially surprised that based on the stock price reaction, this positive ruling doesn’t seem to have been priced in at all or to a very small extent.

So looking back I think I made 3 mistakes:

– I might have overestimated the efficiency of the Italian stock market. I thought a lot of that would be priced in already.
– I could have “isolated” the special effect maybe with a FTSEMIB short position
– requiring a 50% “margin of safety” for such a short term catalyst was maybe too much

Additionally, I think it is important to look at the special situation as special situation first. It might be a mistake to apply both, my usual value criteria plus the “probabilty” approach to special situations.